Research on the Impact of Crypto KOL Tweets: The short-term pump effect is significant, with an average loss of 79 USD after one month for a 1000 USD follow-up investment
When influencers claim to be experts, the post-event return rate tends to be more negative.Author: Deep Tide TechFlow
For retail investors, following various KOL bloggers' calls is an important source of wealth secrets.
So, are KOL calls a guaranteed way to profit, or just a series of coincidences?
Different bloggers provide vastly different answers to this question. A correct call that yields 100 times or a wrong recommendation that leads to a total loss can both represent a highly subjective survivor bias.
From an industry-wide perspective, what are the final results of KOLs' calls?
In February, several researchers from Harvard Business School, Indiana University Kelley School of Business, and Texas A&M University published a paper titled “Cryptocurrency Influencers.”
The article studies the performance of cryptocurrency-related returns mentioned in approximately 36,000 tweets from 180 of the most prominent cryptocurrency social media influencers (KOLs) over a two-year period ending in December 2022, covering more than 1,600 tokens.
Key Findings:
After classifying tweets using machine learning and tracking the price performance of the mentioned tokens through various statistical descriptions and tests, the key findings are as follows:
Cryptocurrency influencers' tweets initially correlate with positive returns. However, these tweets subsequently exhibit significant long-term negative returns, indicating their long-term investment value is minimal.
The aforementioned effects are most pronounced when the tweets involve small coins, have a large number of Twitter followers, and the influencers claim to be experts.
The paper employs machine learning methods to classify tweets and finds that when tweets have more positive sentiment or are related to "buy" recommendations, the aforementioned result patterns are stronger.
Data Evidence
Cryptocurrency influencers' tweets exhibit positive short-term return effects:
When tweeting about a coin, the average one-day (two-day) return rate is 1.83% (1.57%).
For cryptocurrency projects outside the top 100 by market capitalization, the return rate one day after the call is 3.86%.
The earliest significant decline in returns begins five days after the tweet is published. The average return rate from the second to the fifth day is -1.02%, indicating that more than half of the initial gains are eliminated within five trading days.
From a longer-term perspective, the average cumulative returns at 10 days and 30 days after the tweet are -2.24% and -6.53%, respectively. We further document these negative post-event returns, which are even more negative for low market cap cryptocurrencies (where information and liquidity issues are most severe).
Rough estimates suggest that an individual investing $1,000 in cryptocurrencies outside the top 100 on the tweet date and holding for thirty days would incur a loss of $79 (7.9%), with an annualized loss of 62.8%.
So-called experts: When influencers claim to be experts, the post-event return rates become even more negative; and when these experts have more followers, the return rates worsen.
Overall, the research results indicate that the long-term investment advice provided by cryptocurrency influencers is unprofitable on average. Only by exiting positions immediately after the tweet can one profit, but this strategy may not always be feasible due to insufficient market liquidity. Moreover, this immediate selling behavior contradicts the "never sell" culture prevalent in the cryptocurrency community.
Reflection
The collective evidence in the paper suggests that investors should be cautious in following cryptocurrency KOLs' investment advice, as most gains disappear shortly after the tweet is published.
However, the authors of the article also acknowledge that the evidence is not conclusive. Cryptocurrency KOLs may simply be chasing trends or promoting tokens that will gain them the most visibility and followers, thereby benefiting them financially.
Additionally, a more benign alternative explanation is that cryptocurrency influencers genuinely believe that crypto assets will ultimately experience high levels of growth. Influencers may also just focus on recommending short-term purchases and assume that investors know to sell immediately.
Nevertheless, the results of the paper still provide valuable insights, as they offer clear evidence that if a token is held for several months or even years, the investment advice is unlikely to be useful.
The paper also suggests that regulators and business media may encourage more scrutiny of such behaviors to determine whether these activities are related to more relevant conflicts of interest.
Appendix: The TOP 25 Twitter accounts mentioned in the paper (the table reflects rankings from two years ago due to the research period of the paper)
