Social aspects of crypto are the market’s biggest pitfall

• Social media lure is a major pitfall for crypto investors, experts say.
• Research shows online communities and FOMO encourage investors to take out overall risk.
• The effect is amplified by icons and celebrity managers, whose comments can distort perceptions of value and risk.

Tiffany Fong, a retail crypto investor, has largely absorbed the losses from the Great Crypto Crash of 2022 at this point, but she still remembers the embarrassment of discovering that she had lost a small fortune. Her money was locked up in the now-defunct Celsius crypto exchange, an amount worth $200,000 at its peak. And then came the crash.

“It’s embarrassing, just because I’ve been in crypto for so long,” Fong told Insider. “It was a very rookie move to put so much into a centralized platform instead of like my own cold storage wallets.”

She is not alone. Countless letters have come to the Southern District of New York from Celsius clients who say they were misled by the many public statements made by CEO Alex Mashinsky that Celsius was safer than other investments.

“Celsius was sold to the public as an extremely safe place to both make deposits and take loans by Mr. Mashinsky. He kept repeating that security was safe and Celsius was a better and safer place to do business than traditional banks,” a customer letter. reader.

Social media and the highly public-facing nature of crypto add to the allure—and danger—of the space, in part because crypto firms often leverage popularity and a sense of community to attract new investors. That can lead to amateurs caring more about what crypto represents socially, as opposed to what the risk is to their money. So when businesses fail, the subsequent blow to their investment can feel like a blow to their identity.

Crypto “community”

Even investors who consider themselves well-versed in the market can stumble into crypto’s social pitfalls. Fong said she feels personally misled by influencers who endorsed Celsius on their social media accounts, giving the platform some credibility in her eyes.

– At first I was a little skeptical [of Celsius] … If it’s too good to be true, it probably is,” Fong said. “But I was just like, well, they’re smart and they know what they’re doing and they haven’t had any problems. So I said I’ll give it a try.”

Research by Uptal Dhlokia, a marketing professor who studies consumer psychology at Rice University, shows that social pressure in a community — such as the popular subreddit Wall Street Bets — can lead investors to buy into particularly risky projects they wouldn’t otherwise get behind.

“They tend to form this sense of community and a sense of belonging to these groups of people who are complete strangers,” Dhlokia told Insider. “And they come to believe that if things go wrong, they will be supported by this community of strangers.”

The costs of this belief are high. Celsius owes $4.7 billion to its users, which include creditors but also customers whose money was locked up when the firm became insolvent. In court letters, many customers have given up on getting anything back, regretting the sense of community they once felt.

“I have always been a very conservative investor and invested for [Celsius] JUST because Alex Mashinsky has continuously stated, every Friday, that they are safe,” writes one user, referring to the Ask-Me-Anything sessions the CEO held with the Celsius community. “I’m embarrassed, sad and angry,” said the customer.

A 2021 article on the psychological motivations of crypto traders notes that crypto is inherently influenced by social pressure, one of the biggest being the fear of missing out. Digital assets came into the world at the same time as social media, so it is natural that they are connected.

And social media activity can directly affect the price of cryptocurrencies by encouraging investors to jump in, Paul Delfabbro, a co-author of the study told Insider, pointing to the meme stock craze of 2021 as an example of a similar phenomenon.

“Young people in the audience were active [pitching] the next meme token to their followers and the token price would go parabolic over a few days and then crash,” he said.

According to data from social analytics site LunarCrush, mentions of bitcoin on social media are almost perfectly correlated with price fluctuations, with some correlation also seen with social mentions and the price of ethereum and Voyager Token.

All the social siren calls and influencer pumping are amplified by crypto’s many luminaries and industry icons, whose statements can skew the way people perceive value and risk.

Celsius Mashinsky hosted weekly Q&A events on YouTube, where he routinely touted the safety of the firm’s lending product, while Terras Do Kwon cultivated a Twitter persona steeped in memes and edgy commentary.

Cory Klippsten, a crypto veteran and CEO of trading app Swan Bitcoin, is a critic of the glorified heads of crypto firms like Mashinsky and Kwon – both of whom, before their firm’s implosion, enjoyed minor celebrity status.

The desire to elevate CEOs and entrepreneurs to icon status can blind users to potential risks in their investments, Klippsten said. And often they are distracted from their own economic interests with a narrative of popularity and social status.

“The financial incentive of Luna [was] to glorify Do Kwan. It’s for all bag holders to claim he’s the smartest young founder they’ve ever met,” Klippsten told Insider. “What you had was an incentive for the entire Celsius community to look the other way when you see all these red the flags about Mashinsky. They’re constantly encouraged to trick themselves into thinking this thing they own a bunch of is awesome.”