Social media is full of influencers promoting various cryptocurrencies, but is there any value to investors in following their advice?
Last year the Securities and Exchange Commission (SEC) in the US charged Kim Kardashian for promoting a crypto asset on Instagram without disclosing that she had been paid $250 000 for the post. Ultimately, Kardashian paid $1.26 million to settle the case.
This meant that she had broken laws that anyone who has been paid to promote any kind of crypto must be clear about who has paid them, and how much.
"This case is a reminder that, when celebrities or influencers endorse investment opportunities, including crypto asset securities, it doesn’t mean that those investment products are right for all investors," SEC Chair Gary Gensler said in a statement at the time. "We encourage investors to consider an investment’s potential risks and opportunities in light of their own financial goals.”
This was a particularly high profile case, but it is far from the only example of celebrities and social media influencers promoting crypto to their followers. And a new study conducted by researchers from four US universities has revealed just how seriously investors should take Gensler’s warning.
“Minimal investment value”
The paper, entitled Crypto-Influencers, looked at what happened to the value of crypto tokens promoted by prominent social media influencers. It covered 36 000 tweets by 180 individuals, mentioning over 1 600 different cryptocurrencies.
“Our primary results indicate that crypto-influencers tweets are initially associated with positive returns,” the researchers found. “However, these tweets are followed by significant negative long-horizon returns, suggesting that such recommendations generate minimal long-term investment value.”
Specifically, the study found that, on average, these tweets were associated with a 1.83% return on the cryptos they mentioned the first day. However, after three months those same tokens were showing an average loss of 19%.
In other words, there was a short term positive for those who followed crypto advice on social media. However, those gains are quickly, and heavily, eroded.
Are influencers genuine experts in cryptocurrencies?
There are two likely reasons for this. The first is that a lot of what passes for “advice” from “crypto experts” might really just be self-serving.
This is what is known as “pump-and-dump” schemes. These influencers promote a cryptocurrency that they own, knowing that there will be a short-term boost to its price. They then sell out, take those gains and move on to something else.
Although the researchers don’t specifically make any conclusions in this regard, their analysis certainly does add to suspicions that this is prevalent in this market. This is particularly because they found that the difference between short-term gains and long-term losses was bigger when cryptos were promoted by “experts” as opposed to celebrities like Kardashian.
“These effects are most pronounced for tweets issued by crypto influencers proclaiming to be professional financial analysts, especially for smaller cap crypto asset securities and for self-described experts with a high number of Twitter followers,” the study added.
Unable to sell
The finding about “experts” promoting more of the lesser-known tokens is significant because these cryptocurrencies are not as easy to sell as something like bitcoin.
“Some of these coins aren't super liquid, so people are potentially getting stuck in this position and losing lots of money,” one of the researchers, Joseph Pacelli from the Harvard Business School explained.
This is one of the risks in cryptocurrencies that many people don’t consider. As long as sentiment is positive and prices are going up, people don’t worry about whether they will be able to sell out or not. In fact, sticking with a position, or being a “hodler” in crypto parlance, is seen as a virtue.
However, when the views around a token turn bad and the price falls suddenly, many people find that they can’t sell even if they wanted to. And in cases where the price goes to zero, which has happened a number of times, these people are left with completely worthless cryptocurrencies.
Objective and impartial?
Which also highlights the second reason why advice from social media influencers in the cryptocurrencies space is problematic.
Almost all of the tweets that the study covered were encouraging people to buy. Only 15% were negative.
“No one is telling you when to get out,” Pacelli pointed out.
“I would love to see more of these influencers provide a target price, put something objective down in the tweet more often,” he added.
This definitely raises questions about the impartiality of those promoting cryptocurrencies on social media. If what they are putting out is just unbridled enthusiasm without any sense of moderation or appreciation that selling something at the right price is as important as knowing when to buy, then it is certainly questionable.
And as Kim Kardashian’s run-in with the SEC showed, investors would be right to treat these social media influencers with a lot more caution.
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