Investor Sentiment and Efficiency of the Cryptocurrency Market: The Case of the Crypto Fear & Greed Index

This paper aims to simulate cryptocurrency investment strategies using the Crypto Fear & Greed Index and verify whether they outperform passive buy-and-hold investment. Consequently, the study assesses the efficiency of the cryptocurrency market, since no investment strategy generates higher returns than the passive one in an efficient market. The Crypto Fear & Greed Index measures market sentiment using several factors, including price volatility, market volume and momentum, posts on social media, Google Trends data, and Bitcoin’s dominance of the market. The performance assessment is based on two measures: the Sharpe ratio and the mean return. The research concentrates on the 20 largest non-stable cryptocurrencies and uses daily time series for the period starting on 1 February 2018 and ending on 31 December 2021. The findings of the heteroscedasticity and autocorrelation robust testing procedure have both practical and theoretical implications. They indicate that contrarian strategies based on the Crypto Fear & Greed Index may generate significantly better results than the passive investment in the cryptocurrency market. This, in turn, indicates that generally, the cryptocurrency market is still inefficient. Nevertheless, the results show that cryptocurrencies should not be treated as a set of homogeneous coins, as the performance of strategies can vary from one to another.