Creative Translation: “Unveiling the Impact of Encrypted KOL Tweets: Short-Term Shouts Reveal Clear Effects, with an Average Loss of $79 after Following $1000 a Month”

Creative Translation: "Unveiling the Impact of Encrypted KOL Tweets: Short-Term Shouts Reveal Clear Effects, with an Average Loss of $79 after Following $1000 a Month"

Creative Translation: "Unveiling the Impact of Encrypted KOL Tweets: Short-Term Shouts Reveal Clear Effects, with an Average Loss of $79 after Following $1000 a Month"

Article: Authored by Deep Tide TechFlow

For retail investors, paying attention to the recommendations of various KOL bloggers is an important source of wealth creation.

So, are the recommendations from KOLs a surefire way to make money or just a series of coincidences?

Different bloggers have different answers to this question. A correct recommendation that results in a 100-fold return or a wrong recommendation that leads to a total loss can both be subject to survivorship bias.

From the perspective of the entire industry, how have KOLs performed in terms of the recommendations they make?

In February, several researchers from Harvard Business School, Indiana University Business School, and Texas A&M University jointly published a paper titled “Cryptocurrency Influencers.”

The paper studied the performance of cryptocurrency-related assets mentioned in approximately 36,000 tweets published by 180 of the most famous cryptocurrency social media influencers (KOLs) during a two-year period ending in December 2022. The study covered over 1,600 tokens.

Table of Contents
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Key Findings:
Data Evidence
Considerations
Key Findings:
After classifying the tweets using machine learning and tracking the subsequent price performance of the mentioned tokens through various statistical descriptions and tests, the key findings are as follows:

1. Initially, the tweets from cryptocurrency influencers were positively correlated with returns. However, these tweets later showed significant long-term negative returns, indicating minimal long-term investment value.

2. The above-mentioned impact is most prominent when the tweets come from influencers with a small market capitalization, a large number of Twitter followers, and self-proclaimed expertise.

3. By using machine learning methods to classify the tweets, the paper found that the above patterns were even stronger when the tweets had more positive sentiment or were related to “buy” recommendations.

The tweets from cryptocurrency influencers showed positive short-term return effects:

The average one-day (two-day) return rate after tweeting about a particular coin was 1.83% (1.57%).

For cryptocurrency projects outside the top 100 in market capitalization, the one-day return rate after the tweets was 3.86%.

The significant decline in returns started five days after the tweet was published. The average return rate from the second day to the fifth day was -1.02%, indicating that more than half of the initial gains were erased within five trading days.

From a longer-term perspective, the average cumulative return for 10 days and 30 days after the tweet was -2.24% and -6.53%, respectively. We further recorded these negative post-event returns, which were more pronounced for low-market-cap cryptocurrencies (with information and liquidity issues being the most severe).

A rough estimate suggests that an individual investing $1,000 in cryptocurrencies outside the top 100 and holding the investment for 30 days from the tweet date 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 are more negative, and the return rates are worse when these experts have more followers.

Overall, the research results indicate that the average long-term investment advice provided by cryptocurrency influencers is not profitable. Only by immediately liquidating positions after the tweet can one profit from it, but this strategy may not always be feasible due to insufficient market liquidity. Additionally, this immediate selling behavior contradicts the “HODL” (hold on for dear life) culture prevalent in the cryptocurrency community.

The collective evidence presented in the paper suggests that investors should be cautious in following the investment advice of cryptocurrency KOLs, as most returns disappear shortly after the tweet is published.

However, the authors of the paper also acknowledge that the evidence is not conclusive. Cryptocurrency KOLs may simply be chasing trends or promoting tokens that will gain them the most popularity and fans, thereby benefiting them financially.

Furthermore, a more benign alternative explanation is that cryptocurrency influencers genuinely believe that cryptocurrency assets will eventually experience high levels of growth. Influential individuals may also simply focus on short-term buying recommendations and assume that investors know to sell immediately.

Nevertheless, the results of the paper still provide valuable information, as they offer clear evidence that investment advice is unlikely to be useful if one holds onto tokens for several months or even years.

The paper also suggests that regulatory agencies and business media may prompt further scrutiny of such behavior to determine whether these activities are associated with conflicting interests.

Appendix: Top 25 Twitter accounts mentioned in the paper (Table is from 2 years ago due to the research period)