Data interpretation: Can you really make money by following KOLs to buy coins?

Original title: "A study on the impact of crypto KOL tweets: The short-term shouting effect is obvious, and following orders of 1,000 US dollars will result in an average loss of 79 US dollars after 1 month"

Original author: TechFlow

For leeks, paying attention to the shouting of various KOL bloggers is an important source of wealth.

So, is the KOL shouting a general who always makes money, or a coincidence?

For this question, following different bloggers will have completely different answers. A 100-fold correct shouting, or a wrong recommendation that returns to zero, may become a very subjective survivor bias.

From the perspective of the entire industry, what is the final performance of KOLs in bringing orders?

In February, several researchers from Harvard Business School, Indiana University Business School, and Texas AM University jointly published a paper titled "Crypto Influencers."

The paper studies the performance of crypto assets mentioned in approximately 36,000 tweets posted by 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 Results:

After using machine learning to classify tweets and tracking the tokens mentioned in tweets and subsequent price performance through a variety of statistical descriptions and tests, the key results obtained are as follows:

1.Tweets by cryptocurrency influencers are initially associated with positive returns. But these tweets were followed by significant long-term negative returns, suggesting they generate little long-term investment value.

2.The above effects are most pronounced when the tweets have small coins, large Twitter followers, and self-proclaimed experts.

3.The paper uses machine learning methods to classify tweets and finds that the above pattern of results is stronger when the tweets have more positive sentiment or are related to "buy" recommendations.

Data Examples

Tweets from cryptocurrency influencers show positive short-term return effects:

Tweeting a coin to buy it yielded an average one-day (two-day) return of 1.83% (1.57%).

For cryptocurrencies outside the top 100 by market cap, the return after one day of buying was 3.86%

The earliest time when returns start to decline sharply is five days after the tweet. The average return from days two to five is -1.02%, suggesting that more than half of the initial gains are wiped out within five trading days.

Looking at the longer term, the average cumulative returns ending 10 and 30 days after the tweet were -2.24% and -6.53%, respectively. We further document these negative ex post returns, which are more negative for lower market cap cryptocurrencies (where information and liquidity issues are most severe).

A rough estimate suggests that an individual investing $1,000 in a non-top 100 crypto token on the date of the tweet and holding the investment for thirty days would have incurred a loss of $79 (7.9%), an annualized loss of 62.8%.

So-called experts: Post-event returns are more negative when influencers claim to be experts, and worse when these experts have more followers.

Overall, the results suggest that long-term investment advice provided by crypto influencers is unprofitable on average. Profits can only be made by exiting the position immediately after the tweet is published, a strategy that may not always be feasible due to illiquid markets. Furthermore, this behavior of selling immediately goes against the "never sell" culture in the crypto community.

Thoughts

The collective evidence in the paper suggests that investors should be cautious about following investment advice from cryptocurrency influencers, as most gains disappear shortly after the tweet is posted.

But the authors also acknowledge that the evidence is not yet conclusive. Crypto influencers may simply be chasing trends or promoting tokens that will earn them the most visibility and followers, thereby benefiting them financially.

Also, a more innocuous alternative explanation is that cryptocurrency influencers truly believe that crypto assets will eventually experience high levels of growth. It is also possible that influencers are simply concerned with recommending short-term purchases and assuming that investors know to sell immediately.

Nevertheless, the paper's results are still informative, as they provide clear evidence that investment advice is unlikely to be useful if one holds coins for more than a few months or even years.

At the same time, the paper also suggests that regulators and business media may prompt more scrutiny of such behavior to determine whether these activities are related to more relevant conflicts of interest.

Appendix: TOP 25 Twitter accounts mentioned in the paper (affected by the time of the paper research, the table is the ranking 2 years ago)

Original link

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