Crypto Influencers’ Questionable Impact on Investment Returns
FTC Report Prompts Scrutiny of Social Media’s Role in Crypto Scams
Social Media: A Double-Edged Sword for Crypto Investors
A new study by three researchers questions the effectiveness of crypto influencers on Twitter in influencing investment returns. The research, as reported by Wu Blockchain, analyzed the return rates of cryptocurrencies following tweets from prominent influencers.
The study found that while there were initial short-term gains, averaging around 1.83% one day after a tweet, these returns quickly evaporated.
“The average return rate one day (two days) after the twitter sending was 1.83% (1.57%). The return rate of small tokens after one day was 3.86%. The average cumulative returns ending 10 and 30 days were -2.24% and -6.53%.”
This research was prompted by a June 2022 Federal Trade Commission (FTC) report that documented significant investor losses in the cryptocurrency market, with social media platforms identified as a major source of scams. The FTC report found that investors had lost nearly $1 billion since early 2021, with social media responsible for roughly half of those losses.
Many investors viewed social media as a primary source of crypto information, prompting concerns about the accuracy and potential for manipulation within this influential online space. This notion prompted further investigation into the nature of information shared by crypto-influencers and its impact on investment decisions.
The study examined tweets from 180 prominent crypto influencers over a two-year period, encompassing over 35,500 tweets referencing more than 58,000 cryptocurrencies. Interestingly, over half (58%) of these tweets originated from influencers who self-identified as crypto experts, potentially bolstering their perceived credibility among investors.
Research findings revealed that “there are various reasons to suggest that crypto-influencers’ tweets may not be useful to market participants.” However, the study also noted there are arguments supporting the potential benefits of crypto-influencer tweets.
Despite the prevalence of influencer advice, the study’s findings suggest that “crypto-influencers’ tweets may not be a reliable resource for market participants. The research acknowledges potential benefits of influencer activity, such as improving access to information and potentially increasing the viability of cryptocurrency investments.
However, the study also raises concerns about inherent biases within the “crypto culture,” where influencers may downplay potential risks and focus on ever-rising prices. Additionally, the potential for conflicts of interest exists, as influencers might promote specific, high-growth coins to attract followers and increase their visibility.
The study concludes that while the crypto market suffers from significant information asymmetry, influencers may still play a role in improving accessibility. However, the research emphasizes the need for investors to exercise caution and conduct thorough due diligence before making investment decisions based on social media advice.
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