Crypto Influencers Exposed: Following Their Advice Could Cost You Big — Research

Retail investors flocking to the digital currency market are finding themselves bombarded with advice from social media crypto influencers. These self-proclaimed gurus promise insights and recommendations, but a new study suggests their pronouncements may be more flash than substance.

Crypto Influencers: The Impact Of Tweets

The research, conducted by a team at leading universities, analyzed the impact of tweets from over 180 crypto influencers on follower behavior and token prices.

The results paint a concerning picture. While tweets were found to trigger short-term price increases, averaging nearly 2% within the first two days, these gains quickly evaporated. In fact, the study found a cumulative return drop of nearly 7% within a month of influencer endorsements.

The researchers observed a distinct pattern. According to Dr. Kenneth Merkley, co-author of the study, influencer tweets could create a temporary price surge, but this was often followed by a significant decline, suggesting the buying frenzy wasn’t based on long-term fundamentals.

The findings resonate with real-world examples. A recent report, for example, shows the ill-fated CryptoZoo project, spearheaded by YouTuber Logan Paul, which attracted millions in investments before facing accusations of being a “rug pull” – a scheme where developers abandon a project after taking investor money.

Crypto Influencer Recommendations Often Lead To Losses: Study

Recommendations from crypto influencers often result in losses, according to scientists from three universities. Chinese journalist Colin Wu reported that, on average, positions opened based on signals from crypto influencers on X (formerly Twitter) showed a decline of 2.20% after 10 days and 6.50% after 30 days.

This data comes from researchers at Indiana University, Harvard Business School, and Texas A&M University, who analyzed 36,000 tweets from prominent crypto influencers. The study covered recommendations for 1,600 different assets.

Top 25 Crypto-Influencers by Number of Mentions

— Wu Blockchain (@WuBlockchain) May 16, 2024

Celebrity Hype And The SEC Steps In

The rise of influencer marketing in the crypto space hasn’t gone unnoticed by regulators. The report highlights the European Commission’s recent complaint regarding potentially misleading crypto promotions on social media.

Investors Beware

Additionally, the new European Markets Crypto-Assets (MiCA) regulations could hold influencers accountable for market manipulation through their endorsements.

In the US, the Securities and Exchange Commission (SEC) has already cracked down on celebrities promoting unregistered cryptocurrencies. The research mentions high-profile cases like Kim Kardashian and Floyd Mayweather Jr. facing legal action for failing to disclose payments for promoting the EthereumMax token, which subsequently crashed in value.

The study underscores the crucial role of responsible investing in the volatile crypto market. Social media influencers can be entertaining, but they shouldn’t be the primary source of investment advice.

Featured image from Getty Images, chart from TradingView