Crypto Investors Leverage Social Media For Smarter Decisions

A laptop keyboard, Twitter logo displayed on a phone screen and representation of Dogecoin are seen … [+] in this illustration photo taken in Krakow, Poland on April 4, 2023. (Photo by Jakub Porzycki/NurPhoto via Getty Images)

NurPhoto via Getty Images

For seasoned investors, relying on social media for advice might seem absurd. However, according to a 2021 CNBC survey, 37% of those ages 18-34 and 17% of those 35-64 have begun to use social media for serious research into investment ideas.

In addition, researchers have noted that a cryptocurrency’s popularity on sites like X often directly correlates to its overall success or failure. For instance, Yale associate professor Tauhid Zaman and Ph.D. student Khizar Qureshi recently created an “engagement coefficient” to track the rise and fall of coins mentioned on X between 2019-2021. They found that coins generating too low or high of a number were poor investments based on either lack of interest or overhyping, a red flag for scams.

Overall, social media has emerged as a valuable tool for gauging sentiment, viability and currency manipulation, all of which influence whether or not a coin is a wise investment choice.

Here’s what experts believe is the best way to use it for your own portfolio.

Sentiment Matters: “Taking the Temperature” of Crypto For Better Investments

For better or worse, public sentiment has a significant impact on the performance of a cryptocurrency. This is one reason for the rise of social media influencers in the crypto investment spaces. Not only are they making the entire crypto market more accessible to the average person, but they’re also collaborating with specific projects to promote certain coins or offer followers early access to new tokens, which impacts others’ decisions.

Unlike traditional investment vehicles like stocks, most cryptocurrencies are not anchored to regularly published earnings reports. Because of this, crypto is much more likely to fluctuate according to real-time sentiment. Fortunately, the earning potential of these coins is still trackable despite the somewhat unpredictable nature of social media.

To this point, financial data expert Context Analytics uses AI and machine learning models to parse 850 million tweets daily to refine sentiment models. They found that purchasing the top 20% highest-sentiment coins each day and holding them for a day would lead to 1,907% returns.

Although social media is becoming a reliable predictor of crypto success, experts also say it should be used cautiously.

A Tool, Not a Rule: Social Media Shouldn’t Be Your Only Investment Guide

“A lot of garbage comes out of social media when we’re talking about cryptocurrency. Many pump-and-dump schemes in the cryptosphere have social media roots,” Richard Gardner, CEO of Modulus Global, said to me in an interview.

He does acknowledge how these platforms can work to investors’ advantage, though:

“Top hedge funds and financial institutions subscribe to [Modulus’] Social Media Sentiment Analysis System, which has been running for nearly a decade creating multiple petabytes of data, using deep learning neural networks to extract mood and emotions from millions of social media posts every day. It can show trends before the markets fully build it into the pricing,” Gardner continued. This kind of “sentiment foreshadowing,” which is something many financial institutions are adopting, can give investors an edge if they know how to look for it.

There are many other software platforms to measure social media sentiment, such as Ipsos Synthesio and Sprout Social, that can be utilized by investors and traders.

Other industry experts agree with Gardner’s caution, though they also believe in social media’s potential as a critical tool for a larger investment strategy.

Social Media Can Keep Crypto Investors Agile

“Social media helps you better understand the conversations a particular community is having about a project and can be a reasonably accurate indicator of sentiment. It also can help you learn of important developments before others, enabling you to quickly act in a breaking news situation before news coverage appears and the broader public becomes aware of a price-moving event. I wouldn’t rely solely on social media as a trading strategy. Still, it can certainly play an important role if used as part of a broader plan,” said Alwin Peng, co-founder of the decentralized exchange Vertex Protocol, in our interview.

Peng notes that he has seen clear correlations between social media posts about crypto and prices moving in accordance, such as when Elon Musk tweeted about Dogecoin
and caused a 4% bump in value. He also mentions that Vertex users frequently say social media has allowed them to make more informed investment decisions.

“Social media platforms like X greatly impact the price of cryptocurrencies. News, updates, and comments on X spread fast and can impact users’ willingness to buy coins and tokens. Followers are keen on what influential people say, so decisions to buy coins and tokens can be easily swayed by comments made on social media. However, these platforms are just one of the tools I use to guide my investments, not the only thing I rely on,” agreed David Kemmerer, co-founder and CEO of CoinLedger, in an interview.

Experts agree that social media is valuable for gauging investor sentiment and acting as a supplemental tool for your overall crypto investment strategy. However, one needs to stay cautious and understand that too much hype is rarely a good thing.

Social media posts aren’t necessarily subject to the same rigid disclosure regulations that other financial media have, so things like market manipulation and conflicts of interest can also enter the conversation.

Bitcoin Custody Guide: 3 Best Practices For Crypto Security

Replica bitcoins are seen in this photo illustration on November 4, 2017. (Photo by Jaap … [+] Arriens/NurPhoto via Getty Images)

NurPhoto via Getty Images

The idea of bitcoin
self-custody has become extremely popular due to an overall drop in trust surrounding crypto exchanges. With self-custody, individuals maintain total control over the private keys used to access their crypto, rather than allowing a custodian third party (e.g., exchange platforms or online digital wallet services). With $3.8B lost to crypto hacks in 2022, users want to feel more secure than ever.

However, moving cryptocurrency from trading platforms and out of connected wallets does not automatically mean your assets are safe and secure. Bitcoin custody is more complicated than the seemingly binary “online or offline” storage.

“Crypto security is a three-step dance”, told me Aly Madhavji from Blockchain Founders Fund First. “First, educate yourself on digital assets and blockchain. Second, encrypt; treat your recovery keys like a secret treasure, noted offline and stored securely. Evaluate wallet providers meticulously, considering their track record, user feedback, transparency, and security protocols. Use cold wallets for bulk storage, hot wallets for everyday transactions. Finally, be vigilant; employ multi-factor authentication. Your assets’ security is as strong as your weakest protection.”

Before you commit to one option or another, here are three tips that can help you make the most secure choices for your cryptocurrency holdings.

Choose The Right Wallet For Your Level Of Expertise

In general, you can choose custodial or non-custodial wallets for your bitcoin or other digital assets and cryptocurrencies. Custodial means your wallet management is in the hands of a trusted third party; non-custodial means you’re solely responsible for your wallet’s security. Both have pros and cons, but it’s crucial to be honest with yourself when deciding how to handle your crypto.

If you are new to crypto, you want to seek assistance from a verified company or a simpler, hands-off way to manage your digital currency. Your money is not necessarily inherently less safe this way, despite the lower levels of trust in third parties.

Cyberattacks regularly target custodian companies, but it’s worth noting that these companies have beefed up their security and often give users insurance up to a certain amount, similar to fiat banks. They also remove the burden of responsibility that comes with managing your assets. Think of it like keeping your cash in a lockbox at home rather than having a bank account.

On the other hand, non-custodial or self-custody wallets put all of the control (and responsibility) into your hands. This can improve asset safety but also leave you vulnerable to losing your currency to phishing, hacking or physical damage. Forgetfulness is also a real threat. At least 20% of all available bitcoin is lost in forgotten wallets.

Takeaway: Weigh the pros and cons of self-custody versus third-party custody carefully, and be realistic about how much responsibility you want to take for crypto protection.

Never Keep All Of Your Assets In A Hot Wallet

Digital wallets can be hot or cold, and it’s wise to have both. The good news is that self-custody and custodial wallets have hot and cold options, and many users mix and match according to their needs.

A hot wallet is connected to the internet and generates the necessary keys to access funds. This immediately makes it susceptible to hacking, phishing or theft. However, hot wallets are also the easiest way to complete crypto transactions, so it makes sense for most users to have one.

In contrast, a cold wallet, or “cold storage,” is not connected to the internet for extra security, similar to an air-gapped computer. Cold wallets such as the Ledger Nano X or Trezor devices can be purchased commercially. They typically have software that allows you to access your crypto without using your private keys and offer an excellent alternative to storing your keys on the same device your wallet is on. While you can also use options like an encrypted, regular USB drive or even paper copies of your keys, these can be a bit more difficult to maintain securely over the long run.

Regardless of which type of cold storage you choose, be sure never to put more bitcoin than what you immediately need into a hot wallet. Keeping more than that in a connected wallet opens you up to easy theft.

Takeaway: Maintain both hot and cold wallets, but only use hot wallets when you’re ready to complete a transaction.

Stay Rigorous About Safety Measures

Despite the endless horror stories of people losing crypto, irretrievable data or months of work, humans are still terrible at backing up our devices. It cannot be stressed enough how critical it is to secure your wallet by keeping a meticulous backup schedule.

Maintaining up-to-date backups is often the only way to recover your funds should anything ever happen to your digital wallets. Not only should you have a primary backup, but there should be multiple copies, preferably across different encrypted locations, such as USB drives, CDs or external hard drives. Yes, it’s a little tedious, but it’s much better than losing all of your assets to a single computer glitch or failure.

Additionally, it’s best to opt into every security feature you possibly can. This may include using a seed or recovery phrase (like a master password for your wallet) and scheduling regular software updates for your bitcoin programs as well as any device used to access crypto.

Takeaway: Never skip a chance to back up your bitcoin, and utilize every extra layer of security you can.