Key Takeaways
- Most of Bitcoin’s positive returns occur overnight, while trading-hour returns are slightly negative.
- In high-attention periods, the gains tend to reverse during regular trading hours.
- Retail dominance in overnight crypto trading makes Bitcoin returns a stronger short-term sentiment gauge than traditional metrics.
Before Wall Street wakes up, the Bitcoin (BTC) market is pulsing with emotion. Unlike traditional assets, Bitcoin trades 24/7, making it a rare real-time laboratory for investor psychology.
But what if the price movements that happen while most traders sleep aren’t just noise, but a powerful sentiment signal?
A study by Xiamen University—School of Economics researchers dives into Bitcoin’s overnight price behavior, uncovering how it reflects retail investor sentiment and even forecasts volatility in traditional markets, like the S&P 500.
The research opens a new window into how crypto may shape risk across asset classes by isolating returns during off-hours and connecting them to equity market dynamics.
BTC Overnight Returns as a Proxy for Investor Sentiment
Researchers analyzed five-minute Bitcoin price data from CoinAPI covering January 2018 to December 2023, aligned with U.S. stock market trading hours (9:30 AM–4:00 PM ET).
Bitcoin’s daily returns are split into overnight (close-to-open) and trading-hour (open-to-close) components.
This decomposition reveals that overnight returns average 0.093%, while trading-hour returns average -0.029%, indicating a clear return reversal pattern.
The study assessed Bitcoin overnight returns as a sentiment indicator. If these returns reflect retail sentiment, they should show gains overnight and reversals during market hours.
This pattern, known as “daily return reversal,” is supported by data and is especially pronounced when investor attention is elevated.
Investor Attention and Return Reversals
Sorting Bitcoin returns by levels of abnormal investor attention reveals that high-attention periods are associated with significantly stronger overnight returns and more significant return reversals than low-attention periods.
For instance, the overnight return spread between high- and low-attention periods is 1.133%, based on Google Search data, and 0.987% using unique address activity—both statistically significant.
In contrast, trading-hour returns show no consistent pattern across attention levels.
A composite Google Search Index was constructed using principal component analysis on multiple Bitcoin-related search terms to ensure robustness.
The findings remain consistent: Overnight returns increase with investor attention, while trading-hour returns remain relatively flat.
These results highlight that sentiment-driven price movements primarily occur overnight and tend to reverse during the day.
Thus, overnight returns may be a helpful indicator of short-term investor sentiment in the Bitcoin market.
Predictive Power of BTC Overnight Returns for Stock Volatility
Regression results show that overnight Bitcoin returns significantly predict changes in VIX during U.S. trading hours.
A one-standard-deviation increase in Bitcoin overnight returns is linked to a 13% drop in VIX volatility.
This predictive power holds even after accounting for SPX futures, holiday effects and FOMC announcements, suggesting Bitcoin’s overnight activity provides unique information about upcoming equity market uncertainty.
Bitcoin’s overnight returns contain valuable forward-looking sentiment signals, offering significant improvements in predicting VIX movements beyond traditional market indicators.
Greater investor attention corresponds with more significant overnight-to-day return reversals, underscoring sentiment-driven behavior.
Bitcoin overnight returns also significantly predict VIX movements—both in-sample and out-of-sample—outperforming traditional models.
These results hold even after accounting for known VIX drivers and support profitable trading strategies in VIX derivatives.
