We establish that the actions of influential opinion leaders in the digital currency markets and potential investors following their lead drive abnormal cryptocurrency returns. We develop a psychological and behavioral factor, named the herd behavior index, that detects the herd instinct of the investors in cryptocurrency markets and captures anomalies in cryptocurrency returns. Our finding shows that the herd behavior index can explain the variation in cryptocurrency returns. Moreover, there exists a time-series relationship between abnormal returns and the investors’ herd instinct, and the herd behavior index consistently forecasts future digital currency returns. Finally, we find notable gains even after considering transaction costs by implementing a long/short trading strategy based on the herd behavior index.
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