Crypto influencers are giving bad investment advice – and the SEC is taking notice

New research reveals that cryptocurrency advice from social media influencers can cause investors to lose money on average. Are regulators doing enough to protect consumers?

Popular social media influencers – from celebrities to self-appointed financial “experts” – are using their digital platforms to showcase cryptocurrency investments to their many followers. Collectively, their influence can convince investors to direct significant sums into various crypto-tokens or other cyber-assets.

Then it is only natural to ask how their investment advice holds up?

Not good. The new Crypto-Influencers research study, which I co-authored with Ken Merkley, Mark Piorkowski and Brian Williams, finds that following the advice of crypto-influencers generated significant, on average, revenue. negative return depending on holding period. Additionally, the more expert the advisor claimed to be, the steeper the loss.

It is perhaps no coincidence that on March 22, the Securities and Exchange Commission announced actions against eight celebrities for illegally touting crypto-asset securities TRX and BTT for failing to disclose that they were compensated for doing so. These names included actress Lindsay Lohan, social media personality Jake Paul and rapper Soulja Boy. Most of the celebrities agreed to pay a total of $400,000 to settle the charges without admitting or denying the SEC’s findings.

Also caught in the SEC’s enforcement actions that day were crypto-asset entrepreneur Justin Sun and three of his wholly-owned companies, for the unregistered offering and sale of crypto-asset securities and other charges. And last October, Kim Kardashian, one of the most followed celebrities, was among the first celebrities charged with failing to disclose that she received payment for her promotion of crypto asset security EthereumMax, which she accepted for $1.26 million in fines.

Until now, cyberassets and other alternative investment vehicles such as NFTs have largely operated as if they were beyond the reach of government regulators, exposing investors to wild price swings in markets with few guardrails and shady dealings by crypto firm executives. (Exhibit A: The fall of FTX and criminal charges against founder Sam Bankman-Fried.)

The findings in our research paper answer your next question: “Why should we care what social media personalities tweet about cryptocurrency?” Because many likely young or inexperienced investors are tricked into buying crypto assets based on recommendations from influencers, financial and otherwise, where they lose money while the promoters pocket the profits. A report by the Federal Trade Commission in June 2022 indicates that investors lost nearly $1 billion in crypto scams since the start of 2021, with half of that loss coming from social media platforms.

Our research fills a significant gap by studying the investment value of cryptocurrency advice presented on social media. While a number of studies examine social media activity related to other financial assets, such as equity analysts, research on the role of cryptocurrency influencers is very limited.

A big reason to be wary of social media influencers and their financial advice is that they are potentially very bad at it, as our study reveals. We examined the buy-and-hold returns associated with approximately 36,000 tweets issued by 180 of the most prominent social media analysts covering over 1,600 cryptocurrencies for the two years ending in December 2022.

Our primary results indicate that crypto influencers generally recommend that investors buy or hold (rather than sell) crypto assets, and that such tweets are associated with positive and significant short-term returns. However, these investment gains quickly disappear. Returns start to drop significantly in the first five days after the tweets. The average return from days two to five is -1.02%, suggesting that more than half of the initial gains are eliminated soon after the tweets. Furthermore, at longer horizons, the average cumulative returns ending 10, 30, and 90 days after the tweet are -2.24%, -6.53%, and -18.90%, respectively. These results are even worse for smaller market cap tokens that receive significantly less public attention to protect investors.

This evidence is clear from these numbers: On average, crypto influencers give unprofitable investment advice.

Three other points to note from our research:

One: Influencers may have a poor record when it comes to endorsing crypto investments, but self-styled experts are even worse. About 58% of our sample were influencers who described themselves as financial professionals and experts – and have a large following who act on their advice. Their recommendations were associated with more negative investment outcomes than other social influencers.

Two: Our evidence is consistent with “pump-and-dump” schemes, where promoters talk up an investment in exchange for crypto and then quickly sell it when the resulting buzz briefly boosts its price. However, there are also less sinister interpretations of our findings. For example, influencers can simply buy into the crypto culture and believe that prices can only go up. Regardless, our results suggest that influencers do not provide good investment advice.

Three: While social media can be a vehicle for crypto disasters, it is also important to remember its positive role. Social channels promote information sharing among investors who may otherwise make investment decisions in the dark. Recent research documents positive effects of social media platforms on retail investors in stock markets. And my recent research shows that Twitter can have societal benefits as it can help citizens monitor companies and reduce misconduct. In other words, social platforms don’t hurt investors; charlatans do.

It’s a good sign that regulators are finally cracking down on influencers who use their fame to sell crypto products without disclosing conflicts. Despite allegations of years of widespread crypto fraud, many influencers were not prosecuted and fines were small. Even the SEC’s penalties in these recent actions are relatively small, especially compared to fines imposed for investment offenses in the traditional investment arena.

The SEC should continue to prosecute celebrities and potentially increase penalties to deter future misconduct. But the biggest takeaway from our study is simply this: If you want to make money in crypto, don’t take advice from social media celebrities or so-called experts.

Articles represent the opinions of their authors, not necessarily the opinions of the University of Chicago, the Booth School of Business, or its faculty.