The Extremity Premium: Sentiment Regimes and Adverse Selection in Cryptocurrency Markets

Abstract

Using the Crypto Fear & Greed Index and Bitcoin daily data (February 2018 to January 2026, N=2,896), we document that sentiment extremity predicts excess uncertainty beyond realized volatility. Extreme fear and extreme greed regimes exhibit significantly higher spreads than neutral periods -- the 'extremity premium.' Within-volatility-quintile comparisons show a premium (p<0.001, pooled volatility-demeaned Cohen's d=0.21, a post-hoc exploratory test; raw pooled extreme-vs-neutral d=0.40), Granger causality runs from uncertainty to spreads, and placebo tests reject the null. The effect replicates on Ethereum and across 6 of 7 market cycles, though it is sensitive to functional form: comprehensive regression controls absorb regime effects while nonparametric stratification preserves them. An agent-based model is included as an illustrative device only; its spread-uncertainty link is coded rather than emergent, so the inferential weight rests entirely on the empirical analysis. Intensity, not direction, drives uncertainty-linked liquidity withdrawal.