Cryptocurrency investors’ herding and overconfidence: evidence from compounded uncertainty shocks

This paper examines investors’ herding and overconfidence in cryptocurrency markets, with particular attention to their segmented nature with respect to capitalisation, market conditions, and external factors. Using a large sample of 1008 cryptocurrencies, we find no unconditional herding. However, herding emerges in larger cryptocurrencies during periods of high volatility and market downturns. In contrast, overconfidence affects smaller cryptocurrencies during market upturns and high-liquidity periods. External markets, such as stocks, options, and commodities, primarily drive overconfidence in smaller cryptocurrencies. The uncertainty shock following the outbreak of the Russia-Ukraine war in 2022 eliminates herding in larger cryptocurrencies and induces overconfidence in trading smaller cryptocurrencies, while removing the influence of external markets on trading in small cryptocurrencies. Compared with continuous measures of uncertainty, the war outbreak represents a distinct shock with unique behavioural effects. These findings support more granular, asset-size-specific regulatory responses, particularly during geopolitical upheavals. Incorporating event-driven behavioural dynamics into monitoring frameworks may strengthen early warning systems and mitigate systemic vulnerabilities in digital asset markets.