On the effects of information asymmetry in digital currency trading

• Main Authors: KIM, Kwansoo, KAUFFMAN, Robert John
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2024
• Subjects: Asymmetric information; Cryptocurrency; Data analytics; Digital currency; Fintech; Informedness theory; Public information; Social sentiment; Speculation; Trading; Volatility; Databases and Information Systems; E-Commerce; Finance and Financial Management
• Online Access: https://ink.library.smu.edu.sg/sis_research/8733; https://ink.library.smu.edu.sg/context/sis_research/article/9736/viewcontent/InfoAsymm_DigitalCurrTrading_av.pdf
• Institution: Singapore Management University

We report on two studies that examine how social sentiment influences information asymmetry in digital currency markets. We also assess whether cryptocurrency can be an investment vehicle, as opposed to only an instrument for asset speculation. Using a dataset on transactions from an exchange in South Korea and sentiment from Korean social media in 2018, we conducted a study of different trading behavior under two cryptocurrency trading market microstructures: a bid-ask spread dealer's market and a continuous trading buy-sell, immediate trade execution market. Our results highlight the impacts of positive and negative trader social sentiment valences on the effects of information asymmetry on observed trading patterns. This includes the spillover effect of volatile social sentiment, and the leverage effect when a cryptocurrency's value falls or rises in response to changing sentiment. Our results highlight how volatility arises in parallel with investors’ reactions to public information and trade transaction volume. If the price falls beyond participants’ expectations, a negative shock from new information may lead to more volatile social sentiment than a positive shock of the same size does. Our work supports the roles of investment and speculation for cryptocurrency by identifying an immediate impulse and a longer-term effect of economic variables in the presence of sentiment-led information asymmetry. We contribute new knowledge to the interdisciplinary literature on the financial economics of digital currency for a technological innovation that has matured earlier than many observers may realize.