Does Herding Behaviour Among Traders Increase During Covid 19 Pandemic? Evidence from the Cryptocurrency Market

Abstract

Cryptocurrencies are digital currencies and trading these currencies have gained huge momentum in recent years. The sophisticated features, complexities on regulatory framework, and high volatility of Cryptocurrencies would pose trading challenges to new investors and/or investors with limited knowledge. Investors generally are influenced by fund managers, financial analysts or other investors who are considered as well informed and highly knowledgeable peers. Investors mimic their behaviour to perform trading activities and such behaviour is termed as Herding. Covid 19 pandemic triggered severe uncertainties in the cryptocurrencies market and has led to wide fluctuations in prices causing severe volatility and market crashes. This paper aims to examine the herding behaviour in cryptocurrency market during the pre Covid 19 and Covid 19 pandemic period using the Cross-Sectional Standard Deviation (CSSD) approach. The findings of the paper reveal that herding was evident among all the ten crypto-currencies in normal market conditions of the entire sample period but not during market upswing or downswing. However, the herding behaviour was present in the cryptocurrencies Litecoin, Cardano and Dash during the Covid 19 pandemic period in all market conditions.

The Cryptocurrency Market in Transition before and after COVID-19: An Opportunity for Investors?

“…However, the impact of media is reduced when the market returns to a normal phase. This is in line with different studies that use different datasets and time periods [ 125 , 127 , 128 ]. More importantly, the way investors show herding behavior is that they tended to invest in the major and most-tradable cryptocurrencies [ 27 ].…”

Speculative bubbles and herding in cryptocurrencies

“…However, this result does not indicate the opposite; rather, it indicates adverse herding owing to higher risk aversion during extreme periods (da Gama Silva et al 2019 ). This result is also consistent with previous studies suggesting that herding behavior is obvious during normal periods, whereas it disappears during up and down periods (Susana et al 2020 ). Supporting these findings are Vidal-Tomas et al ( 2019 ) and Papadamou et al ( 2021 ), who state that herding in the cryptocurrency market is stronger during down periods as most cryptocurrencies have experienced extreme price increases during the pandemic.…”

“…These cryptocurrency market properties may cause uninformed investors to mimic the transactions of other market participants. Previous studies have also provided strong evidence of herding in the cryptocurrency market (Kallinterakis and Wang 2019 ; Vidal-Tomas et al 2019 ; da Gama Silva et al 2019 ; Kaiser and Stöckl 2020 ; Ballis and Drakos 2020 ; Susana et al 2020 ; Papadamou et al 2021 ; among others). More importantly, cryptocurrency investors tend to herd as uncertainty increases (Bouri et al 2019 ).…”

“…Nonetheless, bullish market dispersion follows market movements faster compared to bearish events. Susana et al ( 2020 ) analyzed herding behavior among 10 cryptocurrencies during both pre-pandemic and pandemic periods. They revealed that herding is common among all cryptocurrencies in normal periods; however, this disappears under up- and down-market conditions.…”

Investor behavior and cryptocurrency market bubbles during the COVID-19 pandemic

“…Furthermore, the pandemic repercussion on cryptocurrency markets and their role in creating bubbles is considerable in this study. These results follow previous studies that demonstrated that the COVID-19 pandemic is responsible for increasing panic states, changing investor attitudes and herding behavior (Yarovaya et al, 2020;Mnif et al, 2020;Susana et al, 2020).…”