Unveiling the Power and Pitfalls of Crypto-Influencers on Twitter
Welcome to the FS blog, your go-to source for insights into the decentralized investment world of new token and NFT launches.
Today, we dive deep into the fascinating and sometimes perilous influence of crypto-influencers on Twitter. Based on recent research by top academics, this post uncovers the true impact of these digital trendsetters on your crypto investments.
The Influence of Crypto-Influencers: A Double-Edged Sword
Crypto-influencers on Twitter have become pivotal in shaping the market, but their advice can be a mixed bag. Here’s what you need to know:
1. Short-term Gains, Long-term Pains
• Immediate Impact: Tweets from crypto-influencers often lead to an average immediate return of 1.83% on the day of the tweet and 1.57% over the next two days.
• Long-term Decline: However, these initial gains are followed by significant losses, with mean cumulative returns of -1.02% within five days, -2.24% within ten days, and a staggering -6.53% after thirty days.
2. The Small Cap Effect
• Greater Impact on Smaller Cryptos: Smaller cap cryptocurrencies see larger initial gains from influencer tweets but also suffer more substantial long-term losses. This highlights the high-risk nature of investing in less established tokens.
3. Expert Influence
• Self-described Experts: Influencers who label themselves as “crypto experts” tend to generate more significant initial returns. Unfortunately, their recommendations also lead to more pronounced long-term declines.
• Follower Count Matters: The negative long-term effects are stronger for influencers with a larger follower base, emphasizing the need for caution when following popular figures.
Unmasking the Market Reaction
The research reveals intriguing patterns in how the market responds to crypto-influencer tweets:
• Short-term Trading Volume
Increased trading activity around the tweet date, especially for smaller cap cryptos, indicates that many investors react quickly to influencer recommendations.
• Potential Pump-and-Dump Schemes
The pattern of initial price increases followed by rapid declines aligns with classic pump-and-dump schemes, where prices are artificially inflated and then sold off for profit.
Key Characteristics of Influencer Impact
Several factors amplify the effect of influencer tweets:
• Past Performance: Influencers with a history of more profitable recommendations see higher immediate returns on new tweets. Conversely, those with poor track records tend to generate negative long-term returns.
• External Content Links: Tweets containing YouTube links or other external content receive stronger market reactions, likely due to perceived higher credibility or additional information.
• Tweet Clustering: When multiple influencers tweet about the same cryptocurrency on the same day, the immediate price response is more significant, but long-term declines are steeper.
Sentiment and Recommendation Analysis
Understanding the content of influencer tweets is crucial:
• Positive Sentiment: Tweets with positive sentiment lead to stronger immediate market reactions, suggesting that promotional content has a significant impact.
• Explicit Recommendations: ‘Buy’ recommendations from influencers result in the most substantial short-term price increases, underscoring the power of direct investment advice.
Cautionary Tales and Regulatory Implications
The findings of this research underscore the importance of caution when following crypto-influencer advice:
• Investment Advice Warning: Investors should be wary of the short-lived gains from influencer recommendations, as long-term profitability is often negative.
• Regulatory Concerns: The study supports regulatory concerns about the potential for influencers to mislead investors, especially through pump-and-dump schemes.
Conclusion
As we navigate the decentralized investment landscape, understanding the dynamics of crypto-influencer impact is essential. While these influencers can drive significant short-term gains, the long-term risks are substantial.
At FS, we are committed to providing you with the insights and tools to make informed investment decisions in new token and NFT launches.
