As an experienced financial analyst, I’ve seen firsthand how retail investors can be easily swayed by the hype and buzz surrounding digital currencies, especially when it comes to recommendations from social media crypto influencers. However, a new study should serve as a stark reminder of the potential pitfalls associated with taking their advice at face value.
Crowds of individual investors entering the digital currency sector are being inundated with guidance from social media cryptocurrency influencers who claim to have expert knowledge. However, a recent investigation indicates that their advice could be more style over substance.
Crypto Influencers: The Impact Of Tweets
A team of researchers from top universities studied how tweets from approximately 180 influential figures in the cryptocurrency sphere influenced their followers’ actions and affected token prices.
The findings reveal a troubling trend: although tweets led to brief price surges, approximately 2% within the initial two days, those profits subsequently vanished. Intriguingly, the research indicated that the long-term impact of influencer endorsements resulted in a substantial decrease in returns, amounting to almost 7%, within a month.
The researchers identified a clear trend in the data: Influential tweets could spark a brief price increase, but this was usually preceded by a substantial decrease later on. As Dr. Kenneth Merkley explained, these buying spikes seemed to be driven more by short-term market sentiment rather than underlying fundamental factors.
The report’s conclusions align well with real-life scenarios. For instance, consider the failed CryptoZoo initiative led by YouTube personality Logan Paul. Despite amassing large investments, this project was later accused of being a “rug pull.” In such schemes, developers abruptly abandon their projects after securing investors’ funds.
Crypto Influencer Recommendations Often Lead To Losses: Study
According to a study conducted by scientists from three universities, following the recommendations of crypto influencers can lead to financial losses. On average, investments made based on these influencers’ signals on platform X (previously known as Twitter) resulted in a decrease of 2.20% after ten days and a more significant loss of 6.50% after thirty days, as reported by Chinese journalist Colin Wu.
Researchers from Indiana University, Harvard Business School, and Texas A&M University examined over 36,000 tweets posted by influential figures in the cryptocurrency sector. Their research encompassed suggestions for approximately 1,600 distinct assets.
Top 25 Crypto-Influencers by Number of Mentions
— Wu Blockchain (@WuBlockchain) May 16, 2024
Celebrity Hype And The SEC Steps In
As a researcher delving into the dynamic world of cryptocurrencies, I’ve come across an intriguing development: the growing influence of influencer marketing in this sector. Regulators have taken note of this trend and expressed concerns over potentially misleading crypto promotions on social media platforms. Recently, the European Commission voiced its complaint regarding this issue.
Investors Beware
The MiCA regulations in Europe may impose responsibility on crypto influencers for market manipulation as a result of their endorsements.
In the United States, the Securities and Exchange Commission (SEC) has taken enforcement actions against several celebrities who endorsed unregistered cryptocurrencies without disclosing their compensation. Notable cases include Kim Kardashian and Floyd Mayweather Jr., who faced legal consequences for not disclosing that they were paid to promote the EthereumMax token, which subsequently experienced a significant drop in value.
The research highlights the significant importance of prudent investment practices in the unpredictable cryptocurrency market. While social media influencers may provide amusement, they should not serve as the sole source of investment guidance.
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2024-05-17 16:11