Khóa luận tốt nghiệp Tài chính ngân hàng: Examining the co-movement between stock market sentiment and cryptocurrency market

GDP Gross Domestic ProductHOSE Ho Chi Minh Stock Exchange HNX Hanoi Stock Exchange COVID - 19 Coronavirus disease 2019 USD United States Dollar VND Vietnam Dong IPO Initial public offeri

VIETNAM NATIONAL UNIVERSITY HANOI

UNIVERSITY OF ECONOMICS AND BUSINESS

FACULTY OF FINANCE AND BANKING

Doe Bow

GRADUATION THESIS

Lecturer : PhD Le Hong Thai

Student : Pham Truong Son

IDcard : 19050728 Class : QH-2019E - TCNH CLC 3

Ha Noi - 2023

I hereby declare that this graduation thesis is my own work, with the support of

my supervisor, and has not copied the work of others This is my own research work Thedata and secondary information used in the thesis are sourced and clearly cited

This statement is entirely my responsibility.

A completed study would not be done without any assistance Therefore, theauthor who conducted this research gratefully gives acknowledgement to their supportand motivation during the time of doing this research as a requirement of completing mythesis.

The author would like to thank the Board of the University of Economics andBusiness-Vietnam National University for creating favorable conditions for the author tocomplete this thesis.

The author would like to thank the lectures of the Faculty of Finance and Banking,University of Economics and Business-Vietnam National University for their help theauthor in the thesis implementation process

In particular, I would like to express my endless thanks and gratefulness to my

supervisor PhD Le Hong Thai who always gives me continuously advices throughout the

process of completion of my thesis His encouragement and comments had significantlyenriched and improved my work Without his motivation and instructions, the thesiswould have been impossible to be done effectively

Thank you sincerely!

TABLE OF CONTENTS

0200.13.0000 iiACKNOWLEDGEMENTS cscssssssssssssnsneeesessessnsnenennseeseseneenenenseeeseaeeceneneeeaeaeaeaceeenensersnananeneeeeeseananes iiiLIST OF ABBREVIATION csssssssssssssssssssessessseseseesesseaeeseneseseaeaeaeeseeeneseuaneceseneseosseasateneneeseeeeananenens viLIST OF FIGURES c.ccssesssesesssessssesessssssesersreceeeneessenereeensseneoreseanecesenenserueceueasneneneoraeenenentennsoranenenes viiLIST OF TABLLES «<< viiiCHAPTER 1: INTRODUCTION ««5c5<S«ssesEsEsEsErsrsrsrstsietrirsrersrsrsrsrrirrararsrsrsersarsre 1

1.1 Research bacgFOund -‹ -ss-s«++++++xe+rkeErketkkeErketrkrtrkrtrkrEkkirtrirrrkirrrirrrkrrrirrrrrrrrrkerrikee 11.2 Research Oj©@CEÏV©S sec HH HH HH HH HH HH H11 gHtrkrrrrretrrkerrrtree 21.3 Research QU€SfÏOTIS -c ss+tE tr HH1 1.1 TLrkrrrkee 21.4 Research SCOD€ << HH HH1 xe 21.5 Research ContriDUtÏOTNS -s-csscrxserrrrrtrkrtrirtrirtrkrtrrtrrrrirrrkrrriirrrrrrrrrkrrrrrrrkrrrerrrkrrrkee 31.6 Structure Of the thesis oe eesessessessesseesseeseeseesessseesseesesssssaseesessesseesseeeaeeseeateeseeesesateenseness 3

CHAPTER 2: THEORETICAL BASIS AND LITERATURE REVIEW -.«.e 4

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2.1.2 Cryptocurrency MarKet «-«-«-«exeseseseskskekesrsekkkEEikkErxrsrsinrie 11

2.1.3 IDV€SfOT SENTIMENL cessssesesneneeeeerseersesensneeeneeaeaearerseeeeeneceseraneeaeaeaeeeseneneneeeeeranarareneeensesenens 162.2 Literature R€VI©W «cty ng HH HH HH1 HHT1111111 1181111911111 182.3 ResearCh Gap «cà TH Hà Hà Hà Hà HH HH HH 1trkrrtrrrree 26

2.4 Chapter SUInimFV «+ HH1 111111111 11111111 111111111111111111111111.1.T1 26

CHAPTER 3: RESEARCH METHODOLOGY «sssssskekrsrsrsrirsrriirirrrrsrsrree 28

3.0 Chapter introduction sesesssssssessssessessstesssesssssessssessssersssesssesssssessseesasensasessaeessanessneessasessaeessseesaes 283.1 Research methods hố ẽ 283.2 Research nh ố ẻ.ẻ.ẻ.ẻ.ẻ 29

iv

CHAPTER 5: CONCLUSION ccsssssssssssessesssesesesesssnseneeaeseeeeeeseneseseseeasaeaeaeaesesesensaesanavavaeereesesenenenans 50

5.1 Summary of research results eseesssecssecssecssesstecstecstecstecstecseesseecneesseecseesseesseesseesseesstesseesseesseesee 505.2 Policy implications seccssessecssecssesssesssecssecssecseesssecssesseecseecsseeseesseeeseessceeseesscessessuessseesucesseessessseeses 515.3 Limitations of the present study and directions for future research 53REFERENCES ccscsssssssesssesssesscssnsnesnsaeessenssesseeaeensansasesessensaneaseneaseasessensansaneseessansaeeneeseansaneneensansaseasanes 54

GDP Gross Domestic Product

HOSE Ho Chi Minh Stock Exchange

HNX Hanoi Stock Exchange

COVID - 19 Coronavirus disease 2019

USD United States Dollar

VND Vietnam Dong

IPO Initial public offering

GFI Greed and fear index

SEC Securities and Exchange Commission

EMH Efficient Market Hypothesis

FEARS Financial and Economic Attitudes Revealed by Search

MP Market Psychology

HOSE Ho Chi Minh Stock Exchange

HNX Hanoi Stock Exchange

CSFB Credit Suisse Fear Barometer

GGM Gordon Growth Model

vi

LIST OF FIGURES

Figure 2.1: The variation of dividend discount model (DDM) « c-ccceceerre 7Figure 2.2: The theories of behavioral finance eesssssssecseesseesseessseeseesssssseesseesseesseesseeseesseense 11Figure 4.1: The movement of GFI Ïn©X sàn By HH TH KH HH Hinh 31Figure 4.2: The movement of cryptocurrencies price from 2019 to 2023 32Figure 4.3: The movement of cryptocurrencies volume from 2019 to 2023 33Figure 4.4: Bitcoin (BTC) price and GEÌL -« -xsscxs+xvs+rtstrrttrkttrrtkrrtrtirrrrrerree 39Figure 4.5: Ethereum (ETH) price and GÌ -s sse+x+terxeterxetrrkrtrrkrrrrkrrrrkrrtrkrrrrkrrrke 41Figure 4.6 : Ripple (XRP) price and GFÌ -ssccxxcrxrrrxrrtrketrrirtrrkrrrrrtrrrrrrirrrrkrrrkerrri 43Figure 4.7 : Litecoin (LTC) price and GEÌ -s-cxcrsrrerrrtrrerrrtrrrrrrrrrrrrrtrrerrrrerrrerrrer 44Figure 4.8 : Bitcoin (BTC) volume and GFÌ « s<+ce++rtt+rtexketxretrkrrtkrttrrrtrrrrrrrkee 46Figure 4.9 : Ethereum (ETH) volume and GFÌ e cssccxetsrxererxetrrterrrkerrtkrrrrkrrrkerrrke 47Figure 4.10 : Ripple (XRP) volume and GÌ , s-ccs+crssrrtrrerrrtrrrrrrrrrrrrrrrrerrrerrrerrrer 48Figure 4.11 : Litecoin (LTC) volume and GF ui esceessesssesssecssecseesseecseecstecseesseecaeesseesatesneesneesseesseesse 49

vii

LIST OF TABLES

Table 2.1 Different characteristics of coins and toÌK©nis - c-c«cxesxeexeerererrerree 14Table 2.2 Different characteristics of coins ANd MEME CỌI « c-ecxeeresereereeee 15Table 4.1: Summary StatiStiCs o.eeecsecsecssesseecseecstecseecseecstecseessessstecseesseesseesneessessneesseesseessessseenteenseesees 36Table 4.2: Correlation Matrix 0 37

viii

CHAPTER 1: INTRODUCTION

1.1 Research background

The cryptocurrency market is a new and growing market that competes directlywith the traditional financial markets In a short history of formation, the cryptocurrencymarket shows amazing growth The value of cryptocurrencies has increased many times

in only a few years, the size of the market capitalization is constantly expanding from 1billion U.S dollars in 2019 to 783 billion U.S dollars till November 2021(Coinmarketcap.com) cryptocurrencies are increasingly proving their dominance in theglobal financial market Therefore, the analysis of the financial market in general isalways one of the interesting areas of research, especially as the markets are developingstrongly as the stock market and the cryptocurrency market

Traditional economic theories, Baker et al.(2004) investors are rational, there isthe argument that markets are efficient and asset prices reflect all information If assetprices move away from their intrinsic value, arbitrage will bring them back to fair value(Fama, 1970) However, this argument has many contradictions when viewed in the field

of behavioral economics Behavioral economics studies have shown that investors are notentirely rational, and asset prices can be strongly influenced by their psychology,emotions, and beliefs Black et al (1986) shows that noise traders tend to trade stocksmainly based on sentiments and not on information; This causes prices in the market tofluctuate without following the fundamentals of traditional economics Shleifer andSummers (1990) simultaneously showed that arbitrageur behavior cannot change stockprices back based on arbitrage theory fundamentals Therefore, it can be said thatinvestor psychology is an important factor for investors' decision making on the stockmarket in particular and the financial market in general In particular, so far, there havebeen studies on the spillover effect of investor psychology among markets For example,research by Nie (2018) shows that profit fluctuations in the virtual currency market arehighly likely to come from the stock market Lopez et al (2019) show that investorsentiment towards stocks can predict the price movement of Bitcoin.

In any market, the development process must also go through many differentperiods And in each period, the market has its own characteristics The COVID-19

pandemic represents a time of shaking stock markets around the world and this can be afactor that strongly affects the performance of investors if not controlled.

Currently, there are no adequate and systematic studies on the various effects ofinvestor sentiment on the cryptocurrency market to serve as a basis for proposingpolicies to manage this money Recently, studies have shown that text-based sentimentindicators may contain more noise than market-based sentiment indicators (e.g., investorsentiment by Baker et al (2006)), however studies using these market indicators haveemerged only recently

Therefore, a comprehensive study of cryptocurrencies and stock marketsentiment to make policy recommendations is very important and urgent in the currentcontext Based on the above requirement, the thesis has chosen the topic "Examining theco-movement between stock market sentiment and cryptocurrency market"

1.2 Research objectives

This thesis aims to achieve the following research objectives:

- To synthesize different types of investor sentiments in the stock market

- To assess the co-movement between stock market sentiments and features of thecryptocurrency market in different contexts: before, during and after the break-out

of COVID-19 pandemic

- To propose some policies for the stable development of the stock market and thecryptocurrency market in the future.

1.3 Research questions

The study focuses on answering the following three main questions:

- Does the co-movement exist between stock market sentiment and the tradingvolume as well as the price returns of the cryptocurrency market?

- Does the COVID-19 pandemic affect such a co-movement?

- What recommendations should be made to avoid the influence of sentiment factors

in order to improve investment efficiency and develop stably the stock market andcryptocurrency market in the future?

1.4 Research scope

- Scope of time: 1/1/2019 - 3/4/2023

- Scope of space: Cryptocurrency market and stock market

- Scope of content: the co-movement between stock market sentiment and thetrading volume as well as price returns of cryptocurrencies.

1.5 Research contributions

The research topic aim to contribute in two main aspects:

- On the theoretical side: This research systematizes issues related to the stock market,the cryptocurrency market (including: the definitions, characteristics, roles, participantsand classifying markets ) and provides an overview of all types of investor sentimentexisting in the stock market and their influence on cryptocurrency market and othermarkets (gold market, commodities market, oil market, bond market)

- On the practical side: The research provides empirical evidence on the influence of thestock market sentiments on the cryptocurrency market through quantitative research.Besides, this study analyzes the co-movement of the stock market sentiment and thecryptocurrency market on the global scale Therefore, some recommendations andsolutions are proposed to improve the management efficiency of agencies in countriesaround the world as well as improve investment efficiency in the cryptocurrency marketand the stock market.

1.6 Structure of the thesis

Chapter 1: Introduction

Chapter 2: Theoretical Basis and Literature Review

Chapter 3: Research Methodology

Chapter 4: Results

Chuong 5: Conclusion

CHAPTER 2: THEORETICAL BASIS AND LITERATURE REVIEW

2.0 Chapter introduction

This chapter summarizes the theories related to the stock market, thecryptocurrency market and the theories of investor sentiments in the stock market First,the chapter will clarify the definition and related terminology, the characteristics of themarkets and how to classify these markets Then, this chapter will summarize the types

of investor sentiment existing in the stock market Finally, the thesis displays previousstudies related to this topic

2.1 Theoretical basis

2.1.1 Stock market

2.1.1.1 The Definition of the stock market

“Market” is a basic concept in economics So far, there have been many differentdefinitions about this In essence, the market is an integrated economic relationship of 5components: goods, supply and demand, prices, transaction and payment methods Thus,wherever/whenever there are enough 5 elements, there will be a market and existingmarket activities There are many different types of markets such as: commoditiesmarket, gold market, foreign currency market, stock market, etc

The security market is also considered a market where the main goods aresecurities (stocks, bonds, etc.) and this market shows the relationship between supplyand demand for capital The prices of securities contain information about the cost ofcapital, also known as the price of invested capital The security market is a part of thefinancial market, where the process of issuing, buying and selling securities, that is bothdebt securities and equity securities

To sum up, we have a simple concept of the security market as: “The market whereactivities such as issuance, trading and buying and selling of securities take place Initialissuance is done in the primary market, and is traded over and over in the secondarymarket.”

2.1.1.2 Characteristics and classification of the stock market

CharacteristicsFirst, stock market offers special goods and services

Goods on the securities market are different from ordinary goods, that is securitiessuch as: stocks, bonds, investment fund certificates, derivative securities Therefore,when investing in securities, investors do not need to care much about their externalappearance/outside, but investors need to care about profitability, potential risks,liquidity

Second, trading activities on the security market are mainly done through brokers.Because the goods of this market are value-transmitting instruments, it is difficult for investors to distinguish securities that meet their legal requirements as well as theirquality Therefore, most countries stipulate that securities trading must go throughintermediary organizations to ensure the interests of investors and stabilize the securitymarket Investors who want to buy or sell securities cannot come to the market tonegotiate but must place buy/sell orders through stockbrokers

Third, the stock market is basically a continuous market

After the security is issued in the primary market, it can be bought and sold againand again in the secondary market The stock market ensures that investors can converttheir securities holdings into cash anytime they want

Fourth, the stock market has the characteristics of a perfectly competitive market.Everyone is free to participate in the market Prices here are formed based onsupply and demand relationships between sellers and buyers There is no priceimposition on the stock market

Fifth, the stock market is highly risky and sensitive

Investors are always affected by risk factors such as the risk of bankruptcy of theissuer, inflation in the economy, the decrease in stock prices or the state of nottransparent market information

Securities are assets that are affected by market fluctuations, such as economic, political, social, military and security fluctuations in the country and around the world.

ClassificasionThere are some following basic classifications:

@ Based on the circulation of capital sources: The stock market is divided into

primary market and secondary market

- Primary Market: The primary market is the market for newly issued securities In thismarket, capital from investors will be transferred to issuers through investors buyingnewly issued securities

- Secondary market: The secondary market is where the issued securities are traded onthe primary market, ensuring liquidity for the issued securities.

@ Based on the mode of operation of the market: The stock market is divided into a

centralized market (stock exchange) and decentralized market (OTC market)

- Centralized market: A centralized security market exchange is a market where thetrading of securities is done at a centralized place called an exchange

- Decentralized market (also known as OTC market - Over The Counter): is a market in which the trading of securities does not take place at a centralized location but through acomputer system and telephone connections between members of the market

2.1.1.3 Components involved in the security market

Participants in the security market usually include: issuers, investors, securitiestrading organizations, security market management organizations and other supporting

organizations.

- Securities issuer

Securities issuers are organizations that need capital and mobilize capital throughthe security market The issuer is the person who provides goods to the market and isresponsible for disclosing information about securities

- Securities investors

Investors are people who invest money in securities for the purpose of makingprofits Investors can be divided into many groups such as corporate investors, individualinvestors, domestic investors and foreign investors

- Securities trader

Participating in securities trading includes organizations such as securitiescompanies (SEC), investment fund management companies (IFMC) and Independentpracticing individuals.

- Market Managers and Supervisors

Participants in the management and supervision of the security market include:the State (through competent agencies such as the State Securities Commission/SSC, theState Bank), self-regulatory organizations (Exchanges, Associations, Association ofSecurities Traders)

- Other ancillary organizations:

In order to ensure that the security market can operate normally, besides theabove subjects, there should be organizations providing securities business support

services such as securities depository and clearing organizations, credit ratingorganizations, securities financing organizations, auditing organizations, security marketinformation technology organizations, etc.

2.1.1.4 Valuation of stock price

v‹,

+* The valuation models of stock price

e Dividend discount model (DDM)

The dividend discount model (DDM) is a quantitative method used for predictingthe price of a company's stock based on the theory that its present-day price is worth thesum of all of its future dividend payments when discounted back to their present value

It attempts to calculate the fair value of a stock irrespective of the prevailing market conditions and takes into consideration the dividend payout factors and the market expected returns If the value obtained from the DDM is higher than the current trading price of shares, then the stock is undervalued and qualifies for a buy, and vice versa.

The basis formula of DDM is the following:

Di D2 ¬ Dn

Po = Gant Tp? Gane (1)

The dividend discount model can take several variations depending on the statedassumptions, including: (1) Gordon growth model; (2) One-period DDM; (3) Multi-periodDDM In which, the Gordon growth model (GGM) which is proposed by Myron J.Gordon,

is one of the most commonly used variations of the dividend discount model Othervariations are used less frequently than the Gordon Growth model

The variations is summarized in Figure 2.1:

Figure 2.1: The variation of dividend discount model (DDM)

Gordon Growth : Multi-Period

Model One-Period DDM DDM

Source: Author s compilation

e Free cash flow to the firm (FCFF)

Free cash flow to the firm was developed by Michael Jensen in 1986 Free cashflow to the firm (FCFF) is the cash flow resulting from operating activities of the business,belonging to all those who provide the company's capital (equity and debt) afterdeducting expenses necessary to keep the business operating This can also be referred

to as unlevered free cash flow, and it represents the surplus cash flow available to abusiness if it was debt-free

The most common equation is the following:

where OCF is operating cash flow; CAPEX is capital expenditures.

e Free cash flow to the equity (FCFE)

Free cash flow to equity (FCFE) is the total amount of cash available to the investors;that is, the company’s equity shareholders, which is the amount the company has after allthe investments, debts, and interests are paid off

The formula is the following:

FCFE = CFO - CAPEX + Net Debt Issued (Repaid) (3)where CFO is cash flow from operating activities, CAPEX is capital expenditures

+* The theories of behavioral finance

¢ The efficient market hypothesis (EMH)

The efficient market hypothesis (EMH) is one of the important knowledge basesand foundations in traditional financial theory

Fama et al (1970) publish his famous article "Efficient Capital Markets: A Review

of Theory and Empirical Work", in which Fama examined the theories and evidence of the

efficient market hypothesis

Ricciardi et al (2000) consider that the efficient market hypothesis hypothesizesthat all the information already reflected in the price of a security or its market value, thecurrent trading price of a stock or bond today, is fair value of securities

Fama (1970) proposes three assumptions of efficient markets based on the extent

to which information is reflected in stock prices The three assumptions of efficientmarkets are weak form, semi-strong form and strong form efficient markets.

The first assumption: rational investor

Rational investors can be understood as investors who correctly assess theunderlying value of a security and respond appropriately to such information In fact, themarket also finds some investors with abnormal behavior, that is, irrational investors.

The second assumption: some irrational investors existSome investors behave abnormally, if their trading activity is random anduncorrelated then their trading activity is excluded by reasonable investors and the result

of this activity does not affect the stock price The logic behind this assumption is that the low correlation of the investor's trading activities is not reasonable.

The third assumption: arbitrage is not restricted

If irrational investors have unusual activity that is highly correlated with eachother, rational investors perceive this mispricing, rational investors use arbitrage bybuying undervalued securities and selling overvalued securities in order to correctmispricing, restore stock prices to their original value, and eliminate abnormal investorbehavior unreasonable investment As a result, the market retains its efficiency (Kadir,2010)

e Random walk theory

The basis of the efficient market theory is the random walk theory The idea of arandom walk was first mentioned in a study by Pearson (1905) However, Kendall (1953)was the first to use the term "random walk" in economics Kendall (1953) said thatchanges in security prices are mutually reinforcing and that changes can occur with equalprobability Malkiel (1973) argues that past changes in the price of any individual security

or an index of the whole market in the past cannot be used to predict future changes

In general, the random walk theory assumes that the past price of a stock has norole in predicting the future price of a stock, i.e the investor's inability to predict thestock's price over time market Thus, if the market follows the random walk principle, it

is determined to be an efficient market.

e Prospect theory

Tversky and Kahneman (1979) with the work "Prospect Theory: An analysis ofDecision under Risk", proposed the prospect theory, according to the author, this is a newmodel used to replace the model of expected utility theory previously in low-riskdecision-making Phan et al (2012) argue that prospect theory helps to explain someirrational behavior such as position reversal, loss aversion, equity premium problem

In general, as prospect theory, investors tend to view the ability to cover asignificant loss more likely to earn more profit When the investment tends to beprofitable, they prefer to grasp the current profit immediately rather than trying to keepinvesting to get more profit in the future Whereas, When the investment is at risk of loss,they try to maintain it in the hope of receiving gain profits in the future, although the risk

of further loss at this time is very large because they think that stocks that are falling inprice will be better than their stocks that are profitable in the future.

Investors have bought stocks because of promising news from the market offerand will quickly sell the stock when the stock price rises Because they believe that stockprices now fully reflect this information When you feel you have achieved desired profit,sell the stock to make a profit without analyzing the possibility of increasing profits

e Arbitrage pricing theory (APT)

Arbitrage theory is a general theory of asset pricing, and it is becomingincreasingly influential in the valuation of stocks

APT states that the expected return of financial assets can be measured throughvarious macroeconomic factors or market factors The sensitivity of an asset to a change

in each factor is represented by a definite quantity called beta Deriving from this theory,the return model for securities has been used to value assets correctly - The asset's priceshould be equal to the expected level at the end of the discounted investment period.discounted to the present at the discount rate calculated in the model Stephen (1976)considers that if the price diverges, the arbitrage opportunity will return it to the samestraight line as the pattern

e Behavioral finance theory

The basic foundation of behavioral finance theory is based on the knowledgeframework built on the arbitrage principle of Miller and Modigliani (1958, 1961, 1963),the efficient market theory of Markowitz (1952), the asset pricing theory of Sharpe,Lintner and Black and the price option theory of Black, Scholes and Merton (1995) withthe assumption that individuals trading in the market hold the law of one price

These principles consider efficient markets and, at a high standard of analysis, areone of the core concepts in the theory of efficient markets There are many definitions ofbehavioral finance theory Ricciardi et al (2000) consider that behavioral finance theory

is built on three main foundations: psychology, sociology, and finance According to this

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theory, the factors affecting the decision-making process of individual investors andgroups of decision makers are considered in behavioral finance theory.

The theories of behavioral finance is summarized in Figure 2.2:

Figure 2.2: The theories of behavioral finance

Digital currency is a general term to refer to currencies that are present in digitalform, of which there are two types: virtual currencies - digital currencies that are notlisted in fiat currency and cryptocurrencies - are digital currencies listed in fiat currency.

Virtual currencies are again classified into two groups, which are convertible andnon-convertible to goods and services and real money In particular, virtual money hasthe ability to convert into goods, services, and real money with a decentralized mechanism that uses encryption technology to authenticate to form a group of

cryptocurrencies

Thus, cryptocurrencies are a part of virtual money, where this currency usescryptographic algorithms/technology to authenticate the coins these and they can beconverted into goods, services and real currencies

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In addition to the IMF, the concept of cryptocurrencies has been introduced bymany international organizations, such as:

The European Central Bank (ECB) has introduced the concept of a cryptocurrency(Cryptocurrency) as an unregulated currency, issued and usually controlled by thefounder, used and accepted by the members ofa particular virtual community (EuropeanCentral Bank, 2012)

By 2015, the ECB had significantly revised its definition of cryptocurrencies.Accordingly, cryptocurrency is a digital display of value, it is not issued by a financialinstitution, in some cases cryptocurrency can be used as a substitute for money

The United States Government Accountability Office (US.GAO),definescryptocurrency as a digital value, not issued by the government Cryptocurrenciescan be used in the virtual economy and cannot be converted into currencies issued bygovernments or can be bought and sold in the real economy and converted into othercurrencies currency at an exchange rate of cryptocurrencies— (United StatesGovernment Accountability Office, 2014)

According to the International Organization for the Prevention of Money Launderingand the Financing of Terrorism (Financial Action Task Force), Cryptocurrency is also adigital value that functions as a medium of exchange, a unit of financial accounts andstores of value but do not have the same legal value as currencies issued by countries(Financial Action Task Force, 2014)

Meanwhile, the Bank for International Settlements (BIS) defines a cryptocurrency

as a stored value or prepaid product in which information about a customer's funds oravailable value is stored on a customer-owned electronic device (BIS, 2016)

According to Gupta et al (2017), Cryptocurrency is a virtual currency that works

on cryptographic technology to ensure the security of transactions and to manage additional generated coins Cryptocurrencies use a distributed operating mechanismdeveloped on the basis of cryptographic technology The most popular cryptocurrencies

in the world today include Bitcoin, Etherum, XRP (Ripple),

Thus, cryptocurrency is digitized money, that is, money in the form of digital bits.Cryptocurrencies are only used in the electronic environment for electronic paymentsthrough information systems including computer networks, the Internet and electronicmeans stored in the database of the issuer and is represented in the form of a digitalaccount that the customer opens at the issuer

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Like paper money, cryptocurrencies function as a medium of exchange andaccumulation of value If the value of the paper money is guaranteed by the issuinggovernment, then in the case of digital currency, its value is guaranteed by the issuer bycommitting to convert the cryptocurrency to paper money at the request of the bank.

owner.

In conclusion, within the framework of this research paper, the author uses theconcept of cryptocurrencies as follows: “Cryptocurrency is a form of digital money, usingBlockchain technology in the process of confirming transactions through a distributedledger, which is issued and controlled by the founder, not through a central authority timeand not subject to the influence of the Central Bank Therefore to manage it according tothe author is to manage the issuer and the exchanges where it is bought, sold, exchanged,and speculated ”

2.1.2.2 Classification of cryptocurrencies

Currently, There are more than 15.000 different types of coins (based on source:https://coinmarketcap.com/) Although there are abundant quantities on the market,there are still certain differences between each coin, depending mainly on the purpose ofuse, the way of formation or the different mining methods

There are 5 ways to classify cryptocurrencies: (1) According to the interactionwith real money and the real economy; (2) According to the conversion capacity; (3)According to the ability to control; (4) According to the issuer; (5) According to the form

According to the conversion capacityCurrently, most cryptocurrencies have the ability to convert to other typesthrough intermediate cryptocurrencies (Stablecoins) such as USTD, USDB, etc Exchangesand banking systems have been allowed to underwrite exchanges such as those in Japanand Korea

According to the ability to control

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Decentralized cryptocurrency is not controlled by any administrator, without anyintermediary organization, units of cryptocurrencies are created and managed by users.This is an open source distributed cryptocurrency, based on complex learning algorithms

in a peer-to-peer payment system that is not operated and controlled by any government.Some examples include Bitcoin, Ethereum, Dash, and Ripple, of which Bitcoin is the mosttypical example

According to the issuing organization (unit) Currently, the majority of cryptocurrencies appearing on the market, onexchanges are cryptocurrencies issued by organizations and individuals and are notregulated by the Central Bank or the Government However, in the near future, manygovernments of countries around the world are researching and launching nationaldigital currencies China is a leading country in the birth of a national digital currency to

be able to control the financial market and compete with the cryptocurrencies that arevery popular in the market such as Bitcoin, Ethereum, Cadano, Solana

According to the existence forms of cryptocurrencies:

Cryptocurrencies are also identified as existing in the form of Coins, Tokens and

Meme coins

@ Distinguish between coins and tokens:

Coins are usually issued in the form of open source, managed and developed in adecentralized form with the purpose of being a means of payment or a hoarding asset Onthe other hand, tokens are usually issued and managed by individuals or companies forthe purpose of exchanging the right to use a particular utility or application.

Table 2.1 Different characteristics of coins and tokens

Coins work independently on their own | Tokens must operate on a blockchainblockchain platform over which they have no control

Use for multi-purposes (can also be used

of value and for transactions network of operations (GAS) or a unit of

exchange within an application

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Coins are typically generated through a

The development time is short, big cost

Tokens are created andtypicallydistributed to the public through ICOs orthrough staking or airdrops

The development time is fast, the cost islower than the coin, capable of inheritingthe features of the foundation blockchain

Source: https://remitano.com/home/vn

@ Distinguish between platform coins and meme coins

To distinguish between coins (with completed blockchain) and meme coin whichare small part of cryptocurrencies, meme coin can be considered as a special form ofcryptocurrency and there are also a few differences between them as follows:

Table 2.2 Different characteristics of coins and meme coin

Coins run independently on their own

blockchain

Most Coins are used as a currency, a store

of value and used for transactions

Coins are usually generated through a

process known as mining or staking

The development time is long, the cost is

The capitalization market is large

Only a very few memecoins are built onthe technology of cryptocurrencies likeDoge and Shiba

The ecosystem, use cases, andfundamentals of the meme coin are oftendefined by the common jokes in

community

Most coin memes have unlimited supply

The price movement is extremely largeand the life cycle is sometimes very short.Prices go up fast and fall very fast too

There are very few coin memes with alarge market cap

Source: https://academy.binance.com/

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2.1.2.3 Participants in the cryptocurrency market

In the virtual economy, cryptocurrencies are created and circulated through theparticipation of 3 main actors: users, brokers, and administrators.

Users are individuals and organizations that hold cryptocurrencies and use them

to buy and sell services, real or virtual goods, or make transfers to others or hold forinvestment private With a decentralized cryptocurrency, users can also mine coinsthemselves through operating special software to solve complex algorithms In this case,they are called miners or miners

Exchanger is an individual or organization involved in the exchange ofcryptocurrencies for real money or another cryptocurrency, or as an intermediary in thepurchase and sale of cryptocurrencies

Administrator is the individual or organization responsible for issuingcryptocurrency, for a centralized cryptocurrency, the administrator is the person whosets the rules for the use, maintains a centralized payment ledger and is the holder of theright to withdraw those issued cryptocurrencies

2.1.3 Investor sentiment

2.1.3.1 The definition of investor sentiment

Market sentiment is the notion that the market moves according to or affected bythe emotional state of its participants This is one of the main themes of behavioraleconomics - an interdisciplinary field that studies the various factors that come beforeeconomic decisions

Many people believe that emotions are the main driver behind volatility infinancial markets, and that overall investor sentiment is what drives so-calledpsychological market cycles

In conclusion, market sentiment refers to the psychology of market participants,individually and collectively Market sentiment is the general feeling of investors and tradersabout the price action of an asset.

The market sentiment is normally divided by optimistic, pessimistic and ignoring.When market sentiment is positive and prices continue to rise, the market is said to be in

an uptrend, commonly known as “a bull market” The opposite case when the price dropscontinuously is called “a bear market”.

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So, market sentiment is made up of the personal views and feelings of all tradersand investors in the financial markets and especially in the cryptocurrency market(which is heavily dependent) In other words, it is the average of the feelings of the market

participants

2.1.3.2 Different types of investor sentiment

OverconfidenceOverconfidence is one of the common sentiment factors affecting investor behavior in the stock market Overconfident investors tend to believe that they are betterthan others in both predictability and good stock selection in buying or selling decisions.However, Odean (1998) has shown that on average, overconfident investors often receivelower-than-market returns Several studies have shown that both men and womenexhibit overconfidence, but men tend to have higher levels of investment confidence(Shih-Wei et al., 2008)

Herd MentalityHerd Mentality refers to the imitation of each other by a group of investors leading

to the actions and decisions of the crowd The behavior of each individual investor in thecrowd is influenced and adjusted by other investors

Herd mentality has the ability to motivate investors to accept to buy shares at highprices, and at the same time believe that the market will still have people willing to buy itback at a higher price In case the crowd buys the same stock, it is easy to create a virtualand immaterial price On the contrary, investors fear that the stock price will drop, whichwill lead to sell-offs to cut losses, causing a floor drop in many stocks.

There are many reasons for herd mentality, such as: overconfidence, tradingvolume, stock holding period, etc The more confident investors are, the more they rely

on them based on personal judgment and personal information to make investment decisions These investors trust their own understanding and reason, so they will ignorethe trend of the crowd or pay little attention to herd behavior When investors put a largeamount of capital into their investments, or with little experience, they tend to go withthe crowd to reduce risk, at least in their opinion If a large group of people agree in theirjudgment, they are certainly right Besides, herd psychology also depends on the type ofinvestor, individual investors will tend to follow the crowd rather than institutionalinvestors when making investment decisions (Goodfellow et al., 2009)

Over-optimism/ Excessive pessimism

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Over-optimism stems from overconfidence and the belief that the future will turnout better than the present They have a belief that their investment decisions will bebetter in the future than they actually are The effect of over-optimism is positive if thispsychological factor stimulates investment in the stock market.

Deaton et al (2002) suggest that while overconfidence often has a positive effectbecause it encourages investment, excessive optimism leads to a negative effect because

it can make investors Management accepts investments in negative NPV opportunitiesand believes that decision will result in a positive NPV Investors who are overlyoptimistic will have an unrealistic view of the value of the company they choose Theytend to believe that good things will come to themselves more than others.

On the contrary, the excessive pessimism of investors will cause the financialmarket to decline heavily, then the monetary and financial policies will be reduced ineffectiveness

Conservatism mentalityWhen conditions change, people tend to be slow to change with those conditions

In other words, they tie their habits to pre-conditions That is, when there is news thatthe economy is in decline, they think that the economic downturn is only temporary, long-term is still going up, without realizing that this signals a multi-year recession cycle hasbegun This effect is the opposite of typical situational deviance People are slow torespond to changes caused by long-term previous habits But if the time is long enough,they will adjust to the changing conditions

Fear of loss mentalityThe fear of loss occurs when investors face risks by holding down stocks andwaiting for prices to rise again Having to make a decision or choice puts investors in astate of fear that they might make a mistake This psychological factor comes from a lack

of self-confidence, lack of knowledge and practical experience in stock investment Thefear of loss will make investors hesitate and skip the good times to act

2.2 Literature Review

s* Types of investor sentiment in the security market

In the same direction of research on the existence of investor sentiment in thestock market in developing countries in Asia, Waweru et al (2008) investigate thesentiment factors affecting investor behavior based on the collection of secondary data.Through this research, the authors find that unlike traditional financial theories said

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before, investors do not always make decisions based on reason Empirical researchresults show the existence of four main types of investor sentiment in the financialmarket, including: greed/fear, overconfidence/pessimism, herd mentality and fear ofloss, have the ability to influence investment decision making.

Similar to Waweru et al (2008), the research of Babajide and Adetiloye (2016)also surveys institutional investors to investigate the relationship between investorssentiment and decision making process However, this study points out the existence ofsix common sentiments in the stock market in developing countries in Asia, namely:Excessive optimism, overconfidence, fear of missing out, Anchoring, pessimism, herdmentality

Hieu Vo et al (2020) explore the behavioral factors affecting investment decisionsand investment efficiency of individual investors through multiple regression analysis.Empirical research results point to factors such as (i) decision anchor, (ii) overconfidence,(iii) predisposition, (iv) crowd effect, which have been positively associated with decisionmaking investment decision The main findings of the study imply that in order toincrease investment efficiency on the HCMC stock market In Ho Chi Minh City, individualinvestors should improve these 5 behavioral factors

Moreover, there are many other empirical studies that have shown the existence

of different types of sentiment in the stock market.

Chandani and Sharma (2003) investigate the correlation between overconfidenceand investment behavior of individual investors in the US stock market, by sending asurvey questionnaire to 78 students randomization includes both graduate andundergraduate students at universities in the United States Research results show thatthere is an overconfidence in students’ stock trading behavior and this psychologicalfactor is likely to have a strong impact on the investment efficiency of these subjects

Similar to Chandani and Sharma (2003), regarding overconfidence sentiment,Barber and Odean (2005) examine investors by genders, and based on previous researchresults to investigate the existence of this mentality on global financial markets as awhole Research results show that “men” are more likely to be overconfident than

“women” They note that men trade 45% more than women, and that men's net profit iscut by about 2.5% a year, while this rate is only about 1.72% for women

With regard to herd mentality, it’s an investor's behavior that mimics the actions

of other investors or follows market movements rather than relying on one's own source

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of strategic information of that investor (Bikhchandani and Sharma, 2001) Philippas etal.(2008) also show the existence of herd mentality and examined herd tendencies underthe most extreme conditions in the market, using daily data from stock exchanges ofcountries such as Greece, Italy, Spain, Portugal during the financial crisis of 2008.Research results show that herd mentality already exists in financial markets and thissentiment factor will extend stronger during the pull market period.

In the same opinion as Philippas et al (2008), the research of Tran Thi Van Anh(2021) investigates types of investor sentiment on the Vietnamese security marketduring the outbreak of the COVID-19 epidemic, the time to collect the research sample isfrom 1/1/2019- 1/1/2021 Research results show that there are four types of investorsentiments that occur in this period: overconfidence and herd mentality, excessivepessimism and fear of failure The author finds that these are the main psychologicalfactors that have led investors’ investment decisions in the face of developments on theCOVID-19 epidemic in the market The study suggests that other sentiment factors do notexist and have no impact on investors’ decision-making during the COVID-19 period

Generally, the above studies show that there are many investor sentiments thatexist in the global security market in particular and the financial market in general.Thereby, we can conclude that there are some common sentiment factors that exist inalmost every human including: overconfidence, over-optimism, excessive pessimism,fear of missing out, and herd mentality

“+ Impact of investor sentiment on the security market:

Investor sentiment is not always based on fundamentals nor can it be explained

by classical financial theories The efficient market theory, although a good idea, cannotprovide an accurate description of real markets (Yang and Li, 2013) This is a branch ofbehavioral finance that uses results from financial models and investor sentiment tomeasure and assess the impact of investor sentiment on price movements and expectedreturn of financial assets

In the same direction of research about over-optimism sentiment, Kyle and Wang(1997) suggest that the existence of over-optimism can lead to higher expected returnswhen over-optimism plays a role as a factor to help promote stronger trading activities

in the market At the same time, excessive optimism often has a positive effect because it

is the motivation for managers to make investments Contrasly, risk aversion often has anegative impact on the security market

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Similarly, Gervais et al (2002) conduct a survey with a sample of 1,200 studentsfrom different universities in the US by distributing a questionnaire and collectingempirical evidence from both graduate and undergraduate students on trends The studyconcluded that student investors are prone to over-optimism.

In contrast, Waweru et al (2008) point out a negative effect of over-optimism that

is that it can induce investors to accept investments in negative NPV opportunities oropportunities assets are too risky Choi et al.(2002) also discover that trading is heavily influenced by psychological biases, misconceptions, and over-optimism.

Especially, Baker and Wurgler (2006) study the relationship between investorsentiment and stock market returns They use six factors, including average differencebetween market value and book value of equity mutual funds (CEFDs), NYSE stockexchange ratio (TURN), the number and average of first-day returns of shares listed forthe first time (NIPO; RIPO), the number of new shares issued (S), the ratio of the number

of shares of the divided companies dividend and non-dividend, regressing each of thesefactors with macro factors Then use the residuals from these regressions to build a model

to measure investor sentiment.

Research results of Baker and Wurgler (2006) show that investor sentiment islikely to affect the stock market When sentiment is estimated to be high, the stock marketbecomes attractive to optimists and speculators and vice versa.

Sharing the same view as Baker and Wurgler (2006), there are a number of otherresearch papers that have re-applied such a research model to measure investor

sentiment

Theologos (2012) apply the research model of Baker and Wurgler (2006) to studythe impact of investor sentiment on stock returns on the UK stock market This paperuses time series data for the period from July 1965 to December 2007 from the OECD database and the data of Baker and Wurgler (2006) The results show that investorsentiment has the ability to predict expected stock returns and has the potential to affectreturns on the stock market

Solt et al (2006) collect data through the distribution of questionnaires andthrough the number of investors with expectation or pessimism in the market to buildthe BSI index, thereby measuring the influence of investor sentiment on the stock market

Using the same direct survey method through the release of surveyquestionnaires, Wang (2007) builds the BSI indicator based on the attitude of investors

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in the market, the ratio of the number of optimistic investors to market and the ratio ofthe number of pessimistic investors to the market The research results show thatchanging investor sentiment affects stock price volatility.

Zhi Da et al (2014) suggest that investor sentiment can be directly measuredthrough the Internet search behavior of households To build a set of metrics, the studyaggregates the search volume for phrases that reveal investors’ emotions through theInternet, such as the words "recession", "bankruptcy" and "unemployment", from millions of households in the United States to construct the Financial and EconomicAttitudes Revealed by Search (FEARS) index

Research shows that the FEAR index predicts profit reversals, specifically, theFEAR index has a low correlation of returns today but predicts high returns tomorrow.Moreover, this effect is strongest for stocks that are favored by investors and are difficult

to arbitrage

In addition, the FEARS index is closely related to daily volatility and it alsocorrelates with VIX future returns The rise in the FEARS index triggers the daily mutualfund to flow out of the stock fund and into the bond fund This evidence is completelyconsistent with the noise trading hypothesis of De Long et al (1990)

In conclusion, in recent years, a number of research studies on the impact ofinvestor psychology on the stock market have been published and received greatattention from the scientific community A number of studies have shown quantitativemodeling of psychological factors and are a step up compared to most studies that focusonly on detecting factors and proposing solutions and implications before.

“+ Impact of investor sentiment on other markets (gold, commodities, oil,

bonds)

e Gold marketBesides the effects of investor sentiment on the security market, there are alsoempirical evidence that investor sentiment can affect other markets in the economy

Matteo et al (2014) explored the impact of investor sentiment on intraday

dynamics in the gold market, using the method novel to detect non-linear causal

relationships The study examines the effects of fear and excitement in the stock market

on gold returns and intraday volatility in alternative quartiles The research results showthat investor sentiment in the stock market is able to impact the return on the gold

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market The authors argue that extreme fear (extreme excitement) contributes toincreased positive (negative) volatility in gold market returns.

Similar to this direction research, Balcilar et al (2017) study the impact ofinvestorsentiment on intraday earnings dynamics in the gold market based on the Economic andFinancial Attitudes index revealed by search (FEARS) The authors demonstrate thatFEARS, as a proxy for investor sentiment, has predictive power for stock market returnsand extend the analysis to gold intraday returns using a newly developed methodology.Next, Balcilar et al (2016) examine the nonlinear stochastic effects of sentiment on goldreturns and volatility, and suggest that the influence of investor sentiment is more

common on intraday volatility in the gold market, than on daily returns However, the

effect is carried over to the discontinuous (jump) component of intraday volatility,particularly in the extreme quintiles, implying that extreme fear (confidence) contributes

to increases the positive (negative) volatility in gold returns

e Commodity marketFor the commodity market, the effects of psychology on this market have beenmeasured and explored by many researchers recently Specifically, Aktham (2019)investigates the impact of investor sentiment on returns and volatility in commoditymarkets The study collects data on the daily closing prices of eight different commoditiesincluding: Aluminum, Crude Oil, Gold, Heating Oil, Natural Gas, Palladium, Platinum andSilver Empirical research results show that investor psychology has the ability to predictprofit and volatility of the commodity market Besides, negative sentiment has a biggerimpact on market volatility than positive sentiment.

Hussein et al (2020) also investigate the impact of investor sentiment during theCOVID-19 pandemic on the commodity market by collecting daily closing price data offour commodities Commodities on the market include Crude Oil, gold, silver, copper, data

is taken from January 1, 2011 to July 30, 2020, including 5363 observations Empiricalresearch results show that investor sentiment has a strong impact on the trading volumeand volatility of gold and crude oil, especially this correlation is stronger when the COVID-

19 epidemic takes place However, investor sentiment does not have much impact onsilver and copper during the COVID-19

e Oil marketFor the oil market, investor sentiment has become an important factor causingfluctuations in the oil market Currently, there have been many analytical studies on the

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correlation between investor sentiment on various aspects of the oil market such as pricevolatility, profitability, and risk.

Zhang et al (2018) use the VaR-GARCH model to detect the extreme risk of crudeoil market during 2007-2017, then explore the causal relationship between investorsentiment and extreme risk in the crude oil market, as well as their lags and co-movements, are related in the time-frequency domain Empirical results show thatinvestor sentiment leads to downside risk but far behind bullish risk in the crude oil market The authors find that investor sentiment can cause extreme risks in the crude oilmarket

Ding et al (2017) investigate the factors that cause oil price volatility by collectingdata on nominal and real prices of two crude oils, West Texas crude oil - as arepresentative for the US oil market and Bent - as a proxy for the global oil market.Research results show that investor sentiment helps to explain fluctuations in oil prices(as well as the prices of gasoline, heating oil and stock prices of oil companies) High/lowsentiment predicts next low/high oil returns, especially over the longer term

e Bond marketAlthough the pervasive influence of investor sentiment in the stock market is welldocumented, little is known about behavioral manifestations in the bond market

EI Altman et al (2014) study the influence of stock investor sentiment on the bondmarket by collecting data on bond prices and trading volume from January 1, 2003 toJanuary 1, 2010 from the database of the trade reporting and compliance tool TRACE (theTrade Reporting and Compliance Engine) Research results show that investor sentimentcan have a negative impact on bond returns through two channels First, in times of highinvestor sentiment, overvalued equity can lead to corporate overinvestment, resulting in

a negative impact on bond valuations due to the increased default risk Second,overvalued equity will attract capital market inflows from the bond market, which cancreate downward pressure on bond prices

Nayak (2010) explores the impact of investor sentiment on bond yield spreads.The results show that bond yield spreads co-variate with sentiment, and that sentimentmispricing and systematic trend reversals are very similar to stocks Bonds appear to beundervalued (with high yields) during periods of pessimistic investor sentiment andovervalued (with low yields) when optimism reigns Consequently, the reverse leads topredictable trends in the post-psychological yield differential When sentiment is low, the

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