Abstract

In the realm of cryptocurrencies, the environmental impact of proof-of-work (POW) mining has long been a contentious issue, primarily due to its substantial energy consumption. This paper explores the transition from POW to proof-of-stake (POS) in Ethereum, known as "The Merge," which drastically reduced energy consumption and enhanced scalability and security. Leveraging a vast dataset of over 1.6 million tweets and specific hashtags, this study constructs a Twitter cryptocurrency sentiment index. Along with the Twitter-based Uncertainty Index constructed by Baker et al., 2021, this study delves into the lead-lag relationship between Ethereum, Bitcoin and the two aforementioned indexes using Pearson correlation, Granger causality, and wavelet analysis. We found that Bitcoin and Ethereum exhibit a lead-lag relationship, that the influence of social media sentiment on cryptocurrency prices appeared not to change post-merge and that Bitcoin and Ethereum remained relatively stable and less susceptible to the effects of the merge. Furthermore, the study develops a lead-lag momentum trading strategy, highlighting a robust relationship between Ethereum and Bitcoin prices, offering lucrative trading opportunities. This research contributes to a deeper understanding of cryptocurrency market dynamics and their interconnectedness with social media sentiment.