Fear and greed control the metaverse market

Dr. Samet Günay from Corvinus University and colleagues used Google searches for ‘cryptocurrency’ to measure investor attention on the cryptocurrency market and the Fear-Greed Index to indicate whether investors are feeling risk-averse (fear) or risk-seeking (greed): both measures represent investor sentiment.

Bitcoin performance was used to represent overall cryptocurrency market performance. Metaverse tokens focused on were WAXP, ONT, MANA, THETA, and ENJ, the values of which were tracked from 2018–2022.

The findings show that investor sentiment has a significant effect on the returns of metaverse tokens, but only during periods of steep market downturns, known as bear markets.

For example, when seeing the cryptocurrency market performing poorly, fear could influence individuals to sell their metaverse tokens to avoid losses. Alternatively, greed could prompt sudden buying to benefit from future rebound in the market. The influence of investor sentiment is not present during bull markets or periods of market stability.

“Both the Bitcoin market and metaverse tokens used in our study witnessed collapses in 2021, around March and November. However, significant causal relationships didn’t emerge and gain strength until 2022. This suggests that investor sentiment exhibits a delay in influencing the returns of the metaverse market,” says Dr. Günay.

The researchers recommend that investors and policymakers take this delay into account. Portfolio management strategies using Google search trends or the Fear-Greed Index to identify trends in the market may be susceptible to losses unless they consider delayed reactions.

This research offers critical insights for investors, analysts, and entrepreneurs navigating the intersection of cryptocurrency and the metaverse. By understanding how sentiment shapes markets during downturns, stakeholders can better anticipate risks and opportunities.

These findings were first published in the International Review of Financial Analysis.