Title: Study Reveals Cryptocurrency Influencers’ Recommendations Provide Little Long-term Value
Author: TechFlow
For crypto investors, following the investment recommendations of various Key Opinion Leaders (KOLs) and bloggers is seen as an important source of wealth creation.
But are these KOL recommendations a consistent winning strategy or just a series of coincidences?
Different bloggers have different answers to this question. A correct recommendation that yields a 100x return or a wrong recommendation that leads to a complete loss can both be subjective survivorship biases.
Looking at the industry as a whole, how do the track records of KOL-led investments fare?
In February, several researchers from Harvard Business School, Indiana University, and Texas A&M University jointly published a paper titled “Cryptocurrency Influencers.”
The paper studied the performance of the mentioned cryptocurrencies in approximately 36,000 tweets from 180 of the most famous cryptocurrency social media influencers (KOLs) during a two-year period ending in December 2022. The study covered over 1,600 tokens.
Key Findings:
Using machine learning to classify tweets and tracking the mentioned tokens’ subsequent price performance through various statistical descriptions and tests, the following key findings were obtained:
1. Initially, tweets from cryptocurrency influencers were positively correlated with returns. However, these tweets later showed significant long-term negative returns, indicating minimal long-term investment value.
2. The above-mentioned impact was most evident when tweets were from influencers who possessed smaller tokens, had a large number of Twitter followers, and self-proclaimed themselves as experts.
3. The study used machine learning to classify tweets and found that when tweets had a more positive sentiment or were related to “buy” recommendations, the aforementioned pattern of results became stronger.
Short-term returns from cryptocurrency influencers’ tweets showed positive effects:
The average daily (two-day) return rate after tweeting about a specific token was 1.83% (1.57%).
For cryptocurrencies outside the top 100 by market capitalization, the one-day return rate after tweeting was 3.86%.
The significant decline in returns began five days after the tweet was published. The average return rate from the second to the fifth day was -1.02%, indicating that over half of the initial gains were wiped out within five trading days.
Taking a longer-term perspective, the average cumulative return after 10 and 30 days since the tweet’s publication was -2.24% and -6.53%, respectively. We further recorded these negative subsequent returns, which were more pronounced for lower market cap cryptocurrencies (where information and liquidity issues were more severe).
A rough estimate suggests that investing $1,000 in cryptocurrencies outside the top 100 by market capitalization and holding the investment for 30 days after the tweet would result in a loss of $79 (7.9%), with an annualized loss of 62.8%.
The so-called experts: When influencers self-proclaimed as experts, the subsequent return rates were more negative, and when these experts had more followers, the return rates were even worse.
Overall, the research findings suggest that the average long-term investment advice provided by cryptocurrency influencers is not profitable. Profits can only be obtained by immediately exiting positions after the tweet is published, but this strategy may not always be feasible due to market liquidity issues. Additionally, this immediate selling behavior contradicts the “hodl” culture prevalent in the cryptocurrency community.
The collective evidence presented in the paper suggests that investors should exercise caution when following investment advice from cryptocurrency KOLs, as most of the returns disappear shortly after the tweet is published.
However, the paper’s authors also acknowledge that the evidence is not conclusive. Cryptocurrency influencers may simply be chasing trends or promoting tokens that will gain them the most popularity and fans, thereby benefiting them economically.
Furthermore, a less harmful alternative explanation is that cryptocurrency influencers genuinely believe that cryptocurrencies will eventually experience high levels of growth. Influential individuals may also focus on short-term buying recommendations and assume that investors know to sell immediately.
Nevertheless, the paper’s results provide valuable insights, as they offer clear evidence that investment advice is unlikely to be useful if one holds onto the tokens for months or even years.
The paper also suggests that regulatory bodies and business media may encourage further scrutiny of such practices to determine if these activities are associated with conflicting interests.
Appendix: Top 25 Twitter accounts mentioned in the paper (Rankings are from two years ago based on the research timeframe)
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This article is authorized and reprinted from TechFlow.
