A cabal of social media influencers may be making a fortune by promoting various cryptocurrencies, but a new study shows the power of enthusiastic ordinary people in changing the price of Bitcoin.
Anyone who has watched the price of cryptocurrencies, or looked at some of the other research done on the sector, will have – at the very least – anecdotal evidence of the way Bitcoin’s value is a reflection of public sentiment. That there is a cause-and-effect relationship, which sees the prices of major cryptocurrencies react strongly to both good and bad news, especially when the market is bearish or bullish, seems intuitive.
Seriously, who hasn’t woken up in the morning, seen the price of their cryptos of choice and gone straight to the internet to find out what the news story was that they’ve missed overnight and that has caused the change in value one way or another. I know I have.
It would also seem intuitive to pay greater attention to those who consider themselves experts in the area, or at least have a status as influencers. Certainly, you would expect the word of those invested in the cryptocurrency space to have more effect on the markets, than the thoughts of infrequent social media users. However, that may not be the case…
Researchers from Stevens Institute of Technology in the US have reported their empirical evidence that the price of BTC is, in fact, effected by public sentiment – but, perhaps more interestingly, that it can be influenced to an even greater extent by ‘enthusiasts’ than ‘professionals’. So what does this mean for the price of BTC going forward?
The paper, titled How Does Social Media Impact Bitcoin Value? A Test of the Silent Majority Hypothesis, has an abstract that states:
“We show that more bullish forum posts are associated with higher future bitcoin values. Interestingly, social media’s effects on bitcoin are driven primarily by the silent majority, the 95 percent of users who are less active and whose contributions amount to less than 40 percent of total messages.”
Secondary to this, the report also states that “messages on an Internet forum, relative to tweets, have a stronger impact on future bitcoin value.”
Specifically, the researchers examined two year’s worth of messages posted to the Bitcointalk forum and 3.4m tweets about Bitcoin from a two-month period, using natural-language processing algorithms. Then, overseen by Stevens School of Business professor, Feng Mai, researchers used a python script to categorise posts and look for statistical points of interest using a technique known as vector error correction, or VECM, which they now claim shows a correlation between online conversations about bitcoin and its price – even when taking in other factors such as stock and commodity prices, and various volatility indices.
The team also, it says, took into account the cyclical nature of the relationship – i.e. how the price of Bitcoin effects sentiment, noting “It’s not a one-way relationship [and] any changes in Bitcoin’s price are obviously going to affect the sentiment around it.”
The team then began to look into regular vs. irregular posters because it was interested in the kind of commenter that can effect prices, after discovering that only a small group of posters accounted for 60% of the total comments.
“Vocal users of social media may sometimes have a certain agenda, in this case hyping or boosting the price of Bitcoin,” says Mai, “because they themselves have invested in it.”
“So,” he continued, “if most of the social messages around Bitcoin are generated by people who are biased, the sentiments on social media may not actually accurately reflect the currency’s actual value.”
As the team delved, it became obvious that it was not this vocal minority with the power, but the silent majority who came in occasional positive comments.
“This was a big finding, and it does seem to prove that people are trusting the silent majority much more, perhaps because they do not seem to have an agenda,” says Mai – adding “It’s also true that, by following the infrequent posters’ comments, you get a much more accurate prediction of Bitcoin’s price over time, and this is useful for investors and potential investors to know.”
The Eye of the Beholder
The team’s research follows a recent similar study by Warwick Business School, claiming that the value of cryptocurrency is driven largely by the mood of investors, rather than economic factors.
Cryptocurrencies as an Asset Class? An Empirical Assessment looked into 14 crypto prices, before concluding that changes are largely based on “the perceived value of the platforms and projects they are associated with”.
In short – as with beauty – crypto values are largely, it posits, in the eyes of their beholder. That one’s personal perception of the value of a product is far more influential that any kind of analysis of the fundamentals underpinning it – at least, in the sense that it can be understood by more traditional investors in stocks, shares and bonds. You can read all the whitepaper’s you want, and be as convinced as you’d like, but nothing’s going to sway a fundamentals investors like, say, Warren Buffet, or Mark Aimes until they can see a balance sheet and witness exactly how they work.
The influence of influencers
Add this to the findings of Mei et al, and a picture builds of how investors in various cryptocurrencies build up an opinion that can be seen as a kind of group-think. Influencers really is the right word for the great and the good of the crypto world, and their social media distributed thoughts. However, the research hints that these days we take into account whether someone may be trying to influence how we see different cryptocurrencies, and that forum and social media users’ process for that is almost intuitive.
Iqbal Gandham, managing director of crypto trading platform eToro, told City AM recently that : “Customer sentiment is really important when it comes to new technologies and cryptocurrencies are no exception.”
We have, of course, also been warned left, right, and centre to not necessarily believe everything we’re told by those with a potential vested interest. Having suffered a long list of problems, hacks and scams, it’s also the case that long-time crypto-enthsiasts may well now be at the once-bitten-twice-shy stage (or more).
If we’re reaching a point in the hype cycle for blockchain and bitcoin that jars with the constant talk of bubbles and references to the dot.com boom, that we’re now sceptical of anyone claiming to be an expert, where can we find confidence in the market going forward. Perhaps in regulation, or in more solid use cases for cryptocurrencies that will see them used in the everyday lives of many more people.
If the Stevens Institute’s research is correct, the markets may now be paying attention to investors with less in the way of vested interests – and thus any recovery for Bitcoin is tied to restoring confidence among this silent majority, to the point where they feel comfortable being positive about cryptocurrencies again.