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Who is Influencing Your Financial Decisions?

Posted On: Saturday, June 3, 2023

Who is Influencing Your Financial Decisions?

Last year Kim Kardashian paid more than $1 million to settle a case with the US financial regulator. She had been charged for promoting a crytpo asset on Instagram, without disclosing that she had been paid $250 000 to do so.

The law in the US states that anyone who has been paid to promote any kind of crypto must be clear about who has paid them, and how much. And the regulator took Kardashian to task for not doing so.

While this was a particularly high profile case, it is far from the only example of celebrities or influencers promoting crypto on social media. And a new study conducted by researchers from four US universities has revealed just how seriously investors should take the warning from the SEC that this “advice” should be treated with a great deal of caution.

Negative returns

The researchers looked at what happened to the prices of crypto tokens promoted by prominent social media influencers. It analysed 36 000 tweets by 180 individuals, mentioning over 1 600 different cryptocurrencies.

“Our primary results indicate that crypto-influencers’ tweets are initially associated with positive returns,” the researchers found. “However, these tweets are followed by significant negative long-horizon returns, suggesting that such recommendations generate minimal long-term investment value.”

What the study found specifically is that, on average, a tweet from a prominent person was followed by a 1.83% gain in the price of the crypto they mentioned the first day. But, within just three months, those same tokens were showing an average loss of 19%.

So while there was a short term positive for those who followed crypto advice on social media, those gains were quickly, and heavily, eroded.

Be warned

The findings raise concerns that many people promoting crypto on social media might really only be serving their own interests. They know the price is likely to go up immediately after their tweet. That gives them the chance to sell out at a profit while others are still willing to buy, and then move on to something else.

This has serious implications for those that follow this advice, particularly since many “experts” promote lesser-known tokens that are a lot harder to sell than something like Bitcoin. Once the prices of these cryptos start going down, people can therefore find it hard to get out. And that means they are locked in to making losses.

This is one of the risks in crypto that many people don’t consider. When there is positive sentiment and prices are going up, people don’t worry about whether they will be able to sell out or not.

But when prices start falling and the mood changes, many people find that they can’t sell even if they wanted to. And in cases where the price goes to zero – which has happened a number of times – these people are left with completely worthless cryptocurrencies.

Buy, buy, buy

This also raises the second concern about advice from social media influencers when it comes to crypto.

Of all the tweets that the study covered, 85% were positive and encouraging people to buy. Only 15% were negative.

“No one is telling you when to get out,” the researchers pointed out.

This must raise questions about how impartial those promoting crypto on social media really are. If they are only ever encouraging their followers to buy without also helping them to understand that a sound investment approach also includes knowing when to sell at the right price, then their advice is certainly questionable.

Which is why Kim Kardashian’s run-in with the regulator is not just a piece of celebrity gossip. It should serve as a warning to investors that they should treat these social media influencers with a lot more caution when it comes to deciding what to do with their money.

To discuss your investment options, speak to a professional.

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