When Celebrity ‘Crypto-Influencers’ Raise Money, Investors Lose Big

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 such as Kim Kardashian and Lindsay Lohan, can allegedly pull in large sums of money to promote new coins and tokens – payments they often fail to disclose.

Unfortunately for retail investors, following crypto advice online, especially from self-described “experts,” has the potential to result in significant financial losses, according to new research from Harvard Business School professor Joseph Pacelli.

Pacelli and his colleagues analyzed about 36,000 tweets in which 180 influencers proclaimed cryptocurrencies over a two-year period. They found that, on average, mentions of cryptocurrencies in tweets are associated with a return of 1.83 percent on the first day, but are later associated with significantly negative returns—an average loss of 19 percent after three months.

Crypto influencers – many of whom are based abroad and use pseudonyms online – rarely advise followers to download digital assets. The research findings are consistent with widespread suspicions of so-called “pump-and-dump” schemes, in which digital asset developers or brokers allegedly boost values ​​through online marketing, then quickly sell, generating superior returns among insiders. However, Pacelli cautions that the study results do not offer a smoking gun. Enthusiasm is inherent in the decentralized financial culture, where eager investors generally expect market values ​​to rise.

“There’s a belief that because crypto is trying to democratize investing and give a new opportunity for people to invest, that you should just hold steady — this thing will eventually take off,” Pacelli says. “So, it could be that these[influencers]are just part of that community and they really think it’s going to go up forever. It could also be that they’re just pushing the hype because they want followers .”

After a rough 2022, the $1.2 trillion global cryptocurrency market remains strong, although its value has more than halved from its 2021 peak of $3 trillion. Last year saw the collapse of cryptocurrency exchange FTX and an increase 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 accused more than a dozen influencers of violating US securities law and recently warned investors about volatility and fraud risks.

Pacelli, the Gerald Schuster Associate Professor of Business Administration, co-authored 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 into 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 ranging 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 the advice of a crypto-influencer’s tweet could see, on average, modest returns in the first two days, with shrinking returns turning to losses on about day five. On day 10, investors lost an average of 2.2 percent, falling further to 6.5 percent on day 30. These results are stronger for tokens with lower market capitalization, where there are fewer alternative sources of information to protect investors from poor investment decisions.

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 to non-experts, especially when they tweeted about less established assets.

These results were particularly troubling, Pacelli says, because “these are the exact people you might hope would give stronger advice.”

Less than 15 percent of tweets were negative, and most tweets expressed excitement and encouraged followers to buy. “No one tells you when to get out, and it’s sometimes hard to get out of crypto,” Pacelli says. “Some of these coins are not super liquid, so people could potentially get stuck in this position and lose a lot of money.”

Kim Kardashian settles crypto charges

Because social media posts can affect short-term demand for specific coins or tokens, securing promotion from influencers is a big business that has caught some big names. In February 2021, Lindsay Lohan tweeted to her more than 8 million followers that she was “exploring” decentralized finance – investing outside the traditional financial system, typically in blockchain-based digital assets. She said she “already liked” 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 the 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.

The eight influencers paid a combined $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, are leveraging social media platforms to provide useful information and “use their influence to advance philanthropic endeavors and advocate for financial freedom.”

When regulations lack bite

Pacelli doesn’t recommend banning paid promotion on social media, calling it a “happy slope.” Instead, he says, higher fines will go a long way in deterring influencers from omitting conflicts of interest from their posts.

“One thing I’ve noticed, as a trend in all 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 give a target price, put something objective in the tweet more often,” he says. For example: “I expect this coin to rise to X dollars within X months.”

This will make it easier to track and hold influencers accountable. “Otherwise it’s just cheap talk,” says Pacelli.