With limited regulatory enforcement and few gatekeepers, crypto influencers with large social-media audiences can move global markets with a single tweet. The most prominent, including celebrities like Kim Kardashian and Lindsay Lohan, can reportedly pull in large sums of money for promoting new coins and tokens—payments they often fail to disclose.
Unfortunately for retail investors, following online crypto advice, especially from self-described “experts,” has the potential to bring significant financial losses, according to new research by Harvard Business School professor Joseph Pacelli.
Pacelli and his colleagues analyzed about 36,000 tweets in which 180 influencers touted cryptocurrencies over a two-year period. They found that, on average, mentions of cryptocurrencies in tweets are associated with a 1.83 percent return in the first day, but are subsequently associated with significant negative returns—an average loss of 19 percent after three months.
"It could also be the case that they’re just pushing the hype because they want followers."
Crypto influencers—many of whom are based overseas and use pseudonyms online—rarely advise their followers to offload digital assets. The research findings are consistent with widespread suspicions about so-called “pump-and-dump” schemes, in which digital asset developers or brokers allegedly boost values through online promotion, then quickly sell, producing outsized returns among insiders. Pacelli cautions, however, that the study results don’t offer a smoking gun. Enthusiasm is inherent in the decentralized finance culture, where eager investors generally expect that market values will soar.
“There's a belief that because crypto is trying to democratize investment and allow a new opportunity for folks to invest, that you should just hold steady—this thing will eventually skyrocket,” Pacelli says. “So, it could be the case that these influencers are just part of that community, and they really believe it’s going to go up forever. It could also be the case that they’re just pushing the hype because they want followers.”
After a rough 2022, the $1.2 trillion global cryptocurrency market is still going strong, though its value is down by more than half from its 2021 peak of $3 trillion. Last year saw the collapse of cryptocurrency exchange FTX and an uptick in scrutiny and enforcement activity by the US Securities and Exchange Commission. The SEC has been slow to issue the regulatory clarification requested by crypto companies, but has charged more than a dozen influencers with violating US securities law and recently warned investors about volatility and fraud risk.
Pacelli, the Gerald Schuster Associate Professor of Business Administration, cowrote the working paper with Ken Merkley, Mark Piorkowski, and Brian Williams of the Kelley School of Business at Indiana University.
Matching tweets and returns—and then losses
To understand how crypto influencers’ tweets translate to returns on digital asset investments, the researchers matched each crypto mention in their sample with daily price tickers from CoinGecko, a website that tracks crypto data, and then calculated returns over time periods from two to 90 days. The 35,569 tweets they studied referenced more than 1,600 unique crypto tokens.
The researchers suggest that investors who followed advice from a crypto influencer’s tweet, on average, could see modest returns in the first two days, with shrinking returns turning to losses by about day five. At day 10, investors were losing 2.2 percent on average, sinking further to 6.5 percent by day 30. These results are starker for tokens with lower market cap, where there are fewer alternative sources of information to help protect investors against bad investment decisions.
"If you took one of these cases and fined the individual $50 million ... I think that would deter a lot of this activity."
Among the 58 percent of influencers in the sample who described themselves as crypto “experts,” “analysts,” or “educators” in their Twitter profiles, the results were more pronounced. The advice of these influencers cost investors 4.5 percentage points more on average, compared with nonexperts, especially when they were tweeting about less established assets.
These results were especially troubling, Pacelli says, because “these are the exact people you might hope would be providing stronger advice.”
Less than 15 percent of the tweets were negative, with most tweets expressing excitement and urging followers to buy. “No one is telling you when to get out, and it's sometimes difficult to get out of crypto,” Pacelli says. “Some of these coins aren't super liquid, so people are potentially getting stuck in this position and losing lots of money.”
Kim Kardashian settles crypto allegations
Because social media posts can affect short-term demand for specific coins or tokens, securing promotion by influencers is big business that has ensnared some big names. In February 2021, Lindsay Lohantweeted to her more than 8 million followers that she was “exploring” decentralized finance—investing outside of the traditional financial system, usually in blockchain-based digital assets. She said that she was “already liking” Tronix (TRX) tokens, a crypto product whose founder was recently charged with fraud.
Lohan failed to disclose the $10,000 she received in exchange for her tweet from Tron Foundation, a company owned by Justin Sun. The SEC alleges that Sun instructed the actress and seven other celebrity TRX promoters, including Soulja Boy (DeAndre Cortez Way) and boxer Jake Paul, to keep quiet about their compensation.
"I would love to see more of these influencers provide a target price. ... Otherwise, it’s just cheap talk."
The eight influencers paid a combined total of $400,000 to dismiss SEC complaints against them without admitting wrongdoing. Last year, Kim Kardashian paid $1.26 million to settle a case in which she was accused of promoting crypto investments without disclosing compensation.
Despite these concerns, more research is needed to determine the overall value of crypto influencers’ investment advice on social media, they write. Some top influencers in the space, such as Coinbase CEO Brian Armstrong and Alex Gladstein of the Human Rights Foundation, leverage social media platforms to provide useful information and “use their influence to promote philanthropic endeavors and advocate for economic freedom.”
When regulations lack bite
Pacelli does not recommend outlawing paid promotion on social media, calling that a “slippery slope.” Instead, he says, higher fines would go a long way in deterring influencers from omitting conflicts of interest from their posts.
“One thing I've noticed, as a trend across all of my research, is that regulation often doesn't have enough bite,” he says. “If you took one of these cases and fined the individual $50 million, if it was a bulletproof case, I think that would deter a lot of this activity.”
Pacelli also challenges crypto influencers to be more specific in their posts and track their success rates over time.
“I would love to see more of these influencers provide a target price, put something objective down in the tweet more often,” he says. For example: “I expect this coin to rise to X dollars within X months.”
This would facilitate tracking and holding influencers accountable. “Otherwise, it’s just cheap talk,” Pacelli says.
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