Does investor attention drive cryptocurrency markets? Insights from network connectedness and portfolio applications

Abstract

This paper explores the role of investor attention in the cryptocurrency market and introduces an attention-enhanced investing strategy within the minimum connectedness portfolio framework. We first examine the spillover effects of investor attention across various cryptocurrency features and investigate how these effects evolve under extreme market conditions. We find that investor attention to leading cryptocurrencies significantly influences attention toward others, highlighting a clear “representative bias" in market attention dynamics. Such investor attention is not driven by rational, value-based judgments; rather, it reflects trends of centralization and extremism in the cryptocurrency market. In addition, we observe a “fair-weather friend" phenomenon, where investors are more interconnected during profitable periods, with a shift toward diversification under heightened market volatility. Furthermore, incorporating extra informational advantage of investor attention has the potential to enhance diversification performance. However, this attention-based strategy proves to be a “double-edged sword"—more effective in stable market conditions with lower systemic connectedness but less so during turbulent periods of rising systemic risk. Finally, we propose relevant protective procedures to mitigate risks during phases when the strategy underperforms.