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.