The Securities and Exchange Commission (SEC) has announced charges against Kim Kardashian for promoting a crypto asset security offered by EthereumMax (EMAX) on social media and failing to disclose her financial interests in promoting the coin. The Kardashian case highlights regulators' growing concern regarding potentially misleading crypto investment advice on social media through influencer accounts. In June 2022, an FTC report indicates that investors lost nearly $1 billion in crypto scams since the start of 2021, with half of this loss stemming from social media platforms. However, many crypto investors argue that social media provides a powerful platform for sharing and distributing timely crypto-related information.
The objective of this study is to shed light on the investment value of crypto social media advice by examining its association with crypto security returns. The study examines the properties of investment advice made by 180 of the most prominent social media influencers endorsing crypto asset securities on Twitter, who issued 35,569 unique Tweets over the two-year sample period and referenced 58,271 (1,690) cryptocurrencies (unique cryptocurrencies). The study also examines how such return patterns vary based on whether the crypto-influencers self-describe as crypto experts and whether these self-described experts have a large audience following. The value of crypto-influencer investment advice is ex-ante unclear and warrants an empirical investigation. Such influencers may subscribe to the "crypto culture" belief that crypto securities should only increase in price and fail to acknowledge potential price declines or risks, thereby issuing poor investment advice.
Moreover, crypto-influencers may be subject to severe conflicts of interest, such as promoting coins that are experiencing high growth to gain more followers and visibility, or being involved in more concerning "pump and dump" schemes, which arise because crypto-influencers often receive payments from crypto creators to pitch or promote particular crypto assets. However, crypto-influencer tweets may also help investors as these influencers could have significant expertise and knowledge and genuinely add value by sharing valuable information and increasing the viability of cryptocurrency as a democratic alternative form of investment, leading to more market acceptance of cryptocurrencies and higher crypto prices. Evidence from other social media settings in more established markets such as stock markets indicates that social media analysts generally add value. Finally, reputational concerns may also discipline crypto-influencers from misleading investors as any short-term gains may come at the cost of long-term decreases in followers, visibility, and social media profits if their behavior is subsequently deemed to be questionable or misleading.
The study incorporates data from several sources, including lists of available crypto currencies along with daily cryptocurrency price data from CoinGecko, a website that specializes in crypto data. The study obtains lists of the most influential crypto-influencer accounts and merges them with data on individual tweets from Twitter from 2021 to 2022, which captures the largest historic rise in cryptocurrency trading. The primary unit of observation is an individual mention of a crypto currency in an influencer's tweet.
The study examines whether and to what extent crypto-influencers' mentions of specific crypto currencies are associated with crypto prices, as evidenced through both short-run and long-run price changes following their tweets.
So, in other words, the authors examine the impact of social media influencers on cryptocurrency investments and find that their advice is generally unprofitable, suggesting that these influencers may have pump-and-dump incentives or provide poor investment advice.
The authors' findings support the SEC and investor groups' concerns about the potential for social media to mislead investors, particularly retail investors, and suggest that there is a need for traditional gatekeepers in the cryptocurrency market.
The study also shows that market responses to crypto influencers are more pronounced for self-described experts, especially for smaller market caps and experts with larger Twitter followings, raising concerns about the advice given by those who are perceived as most likely to educate investors.
Overall, the authors' findings suggest that caution should be exercised when relying on social media influencers for cryptocurrency investment advice.