Cryptocurrency Crises: The Role of Sentiment, Financial Stress, and Economic Policy Uncertainty
Cryptocurrency Crises: The Role of Sentiment, Financial Stress, and Economic Policy Uncertainty

Summary/Abstract: This paper investigates the economic and behavioral determinants of crises in three major cryptocurrencies: Bitcoin, Ethereum, and Ripple. It focuses on the impact of key factors such as returns, volatility, investor sentiment, the Financial Stress Index (FSI), and Economic Policy Uncertainty (EPU). Crises are identified using the CMAX method, while their determinants are analyzed using both probit and logit models. The analysis identifies three major crises for Bitcoin – linked to the European sovereign debt crisis, the collapse of Mt. Gox, and the COVID-19 pandemic – along with a prolonged crisis in Ethereum from January 2018 to January 2021, and a persistent crisis in Ripple with no observed recovery. Results show that higher returns significantly reduce the likelihood of crises across all three cryptocurrencies, while increased volatility consistently raises crisis probability, reflecting heightened market uncertainty and risk aversion. Investor sentiment, measured through Google Trends, shows asset-specific effects: both optimistic and pessimistic sentiment increase crisis risk for Bitcoin and Ripple, while only pessimistic sentiment significantly affects Ethereum. Additionally, both FSI and EPU are positively and significantly associated with crisis occurrence, underscoring the influence of macro-financial stress and policy uncertainty on cryptocurrency stability.

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