We all have been witnesses to the influence of social media on stocks. Some called 2021 the year of the meme stocks after AMC and GameStop soared due to discussions on social media and other forums. These venues are becoming among the top places younger investors look to for investment advice. Even more intriguing is that social media may become a key metric for how investors judge the direction of crypto assets.
Twitter goes financial
In the Twitter Trends 2022 report, one of three major trends is “Finance Goes Social.” The simple meaning of this trend is that investing is now part of the conversation on social media, similar to the many other topics discussed in the modern public square. This could be looked at as a quantitative addition to social media conversations, however, that would miss an underlying current that is changing the way people go about investing.
Finance becoming a topic on social media is not like people posting their favorite foods, vacation spots or their dog. People are looking to learn more about investing on social media. They want to hear what other people think, where they are investing, good tips and more.
According to internal data from Twitter, over the course of the years 2020 and 2021, there were more than one billion tweets about crypto. The increase from 2020 to 2021 was sixfold. In January 2022 alone, there were 299 million crypto-related tweets. Tweets about finance in general increased 78% year-over-year in 2021 as opposed to 2020.
Young people turn to social media
Who is looking for advice on social media? A CNBC survey published in August 2021 showed just how much social media is emerging as an important place for investing information. 12% of people aged 18-34 learned how to invest on social media. When it came to researching investment ideas, 37% of people aged 18-34 and 17% of those aged 35-64 turned to social media. A creditcards.com survey taken in March 2021 found that 28% of Gen Z and 24% of millennials were likely to get advice on investing from social media.
In a survey from M1 finance from January 2022, approximately 60% of Gen Z and millennials have taken investment action as a result of social media.
Our company, eToro, conducted a survey of US adults which found that 80% of the respondents use social media as a resource for investment information, 66% said information on social media increased their investing confidence and 40% said that if left on their own, they would not feel confident in investing.
Crypto and social media
If social media is now playing a role in the general finance world, it is playing a larger role in the crypto world. The reason is that social media fills a void that does not exist in the general investment world.
For crypto, social media can provide an important estimation of value, something it lacks compared to regular assets, like stocks.
The valuation of regular assets, such as stocks, is grounded in earnings reports which come out quarterly. These reports serve as an anchor for assets whose prices can fluctuate based on various circumstances and investor emotions. The earnings reports can be a booster for the stock or a sober reminder of the real value of the asset.
Crypto does not have this anchor. It isn’t a regular company with a structure of financials. Instead, the valuation of crypto is going to be primarily based on sentiment. Social media can provide in real time a perspective of where that sentiment is heading.
Social media can measure crypto sentiment
Social media is one possible metric for measuring sentiment in the crypto world.
There is a direct correlation between sentiment toward crypto and their performance. According to TheTie, Social Market Analytics (SMA) parses through 850,000,000 tweets every day using proprietary machine learning and natural language processing technology to derive sentiment on cryptocurrencies.
In the chart here from TheTie, the performance of buying an equally weighted basket of the top 100 coins segmented by top 20% highest sentiment down to top 20% lowest sentiment is measured. The results were that buying the top 20% highest sentiment each day and holding the coins for a day returned 1,907% from the beginning of 2021 thru July 2022.
Buying the top 20% highest sentiment coins each day during this time period returned nearly a 20x outperformance vs Bitcoin and 4x outperformance of Ethereum.
The black line represents the performance result of buying all cryptos in the top 20% of sentiment and shorting all cryptos in the bottom 20% by sentiment for a ten-month period. The result was an almost 800% return on investment.
The implication of these statistics is a correlation between positive sentiment and return on investment for cryptos. If a person is looking to enter the crypto world and is looking for guides in terms of where and how to invest, these statistics show that favorable sentiment can be a good place to look.
Look to social for future trends
2021 was a breakout year for social media’s impact on investment decisions. This impact is more salient with younger people who use social media in greater numbers and more frequently. Moreover, social media plays a more central role in the lives of younger generations than older ones. The impact of social media on regular investments and crypto may only increase in the coming years.
Since that is the case, sentiment and social media could be considered when trying to gauge the future trajectory of an asset. This is especially true in the crypto world where sentiment and social media discussions can be considered a supplement to fundamental analysis.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
Shiran Herzberg, Head Of Media Partnerships, eToro.
This article was published through Cointelegraph Innovation Circle, a vetted organization of senior executives and experts in the blockchain technology industry who are building the future through the power of connections, collaboration and thought leadership. Opinions expressed do not necessarily reflect those of Cointelegraph.
Learn more about Cointelegraph Innovation Circle and see if you qualify to join