Twitter sentiment analysis and bitcoin price forecasting: implications for financial risk management

PurposeThe present study distinguishes itself by pioneering an innovative framework that integrates key elements of prospect theory and the fundamental principles of electronic word of mouth (EWOM) to forecast Bitcoin/USD price fluctuations using Twitter sentiment analysis.Design/methodology/approachWe utilized Twitter data as our primary data source. We meticulously collected a dataset consisting of over 3 million tweets spanning a nine-year period, from 2013 to 2022, covering a total of 3,215 days with an average daily tweet count of 1,000. The tweets were identified by utilizing the “bitcoin” and/or “btc” keywords through the snscrape python library. Diverging from conventional approaches, we introduce four distinct variables, encompassing normalized positive and negative sentiment scores as well as sentiment variance. These refinements markedly enhance sentiment analysis within the sphere of financial risk management.FindingsOur findings highlight the substantial impact of negative sentiments in driving Bitcoin price declines, in contrast to the role of positive sentiments in facilitating price upswings. These results underscore the critical importance of continuous, real-time monitoring of negative sentiment shifts within the cryptocurrency market.Practical implicationsOur study holds substantial significance for both risk managers and investors, providing a crucial tool for well-informed decision-making in the cryptocurrency market. The implications drawn from our study hold notable relevance for financial risk management.Originality/valueWe present an innovative framework combining prospect theory and core principles of EWOM to predict Bitcoin price fluctuations through analysis of Twitter sentiment. Unlike conventional methods, we incorporate distinct positive and negative sentiment scores instead of relying solely on a single compound score. Notably, our pioneering sentiment analysis framework dissects sentiment into separate positive and negative components, advancing our comprehension of market sentiment dynamics. Furthermore, it equips financial institutions and investors with a more detailed and actionable insight into the risks associated not only with Bitcoin but also with other assets influenced by sentiment-driven market dynamics.