Social media offers crypto investors real-time insights

For seasoned investors, it may seem absurd to rely on social media for advice. However, according to a 2021 CNBC survey, 37% of those ages 18-34 and 17% of those 35-64 have started using social media for serious research on investment ideas.

Additionally, researchers have noted that a cryptocurrency’s popularity on sites like X is often directly related to its overall success or failure. For example, Yale Associate Professor Tauhid Zaman and Ph.D. student Khizar Qureshi recently created an “engagement coefficient” to track the rise and fall of coins named on X between 2019-2021. They found that coins generating too low or high a number were poor investments based on either a lack of interest or overhyping, a red flag for scams.

Overall, social media has emerged as a valuable tool for gauging sentiment, viability and currency manipulation, all of which influence whether or not a coin is a wise investment choice.

Here’s what experts believe is the best way to use it for your own portfolio.

Sentiment Matters: “Taking the Temperature” of Crypto for Better Investments

For better or worse, public sentiment has a significant impact on the performance of a cryptocurrency. This is one reason for the rise of social media influencers in the crypto investment spaces. Not only do they make the entire crypto market more accessible to the average person, but they also collaborate with specific projects to promote certain coins or offer followers early access to new tokens, influencing others’ decisions.

Unlike traditional investment instruments such as stocks, most cryptocurrencies are not anchored to regularly published earnings reports. As a result, crypto is much more likely to fluctuate according to real-time sentiment. Fortunately, the earning potential of these coins is still traceable despite the somewhat unpredictable nature of social media.

To this point, financial data expert Context Analytics uses AI and machine learning models to analyze 850 million tweets daily to refine sentiment models. They found that buying the top 20% coins with the highest sentiment every day and holding them for a day would result in a 1,907% return.

Although social media is becoming a reliable predictor of crypto success, experts also say it should be used with caution.

A tool, not a rule: social media shouldn’t be your only investment guide

“A lot of garbage comes out of social media when we talk about cryptocurrency. A lot of pump-and-dump schemes in the cryptosphere have social media roots,” Modulus Global CEO Richard Gardner told me in an interview .

However, he acknowledges how these platforms can work to investors’ advantage:

“Top hedge funds and financial institutions are signing up [Modulus’] Social media sentiment analysis system, which has been running for almost a decade and creates multiple petabytes of data, using deep learning neural networks to extract sentiment and emotions from millions of social media posts every day. It can show trends before the markets fully factor them into pricing,” Gardner continued. This kind of “sentiment foreshadowing,” which is something many financial institutions adopt, can give investors an edge if they know how to watch for it. search.

There are many other software platforms for measuring social media sentiment, such as Ipsos Synthesio and Sprout Social, that can be used by investors and traders.

Other industry experts agree with Gardner’s caution, though they also believe in social media’s potential as a critical tool for a larger investment strategy.

Social media can keep crypto investors nimble

“Social media helps you better understand the conversations a particular community is having about a project and can be a fairly accurate indicator of sentiment. It can also help you learn about important developments before others, which able to act quickly in a breaking news situation before news coverage appears and the wider public becomes aware of a price-moving event. I would not rely solely on social media as a trading strategy. However, it can certainly be an important role if used as part of a broader plan,” said Alwin Peng, co-founder of the decentralized exchange Vertex Protocol, in our interview.

Peng notes that he has seen clear correlations between social media posts about crypto and prices moving in accordance, such as when Elon Musk tweeted about DogecoinDOGE and caused a 4% bump in value. He also mentions that Vertex users often say social media has allowed them to make more informed investment decisions.

“Social media platforms like X have a huge impact on the price of cryptocurrencies. News, updates and comments on X spread quickly and can influence users’ willingness to buy coins and tokens. Followers are keen on what influential people say , so decisions to buy coins and tokens can easily be swayed by comments made on social media. However, these platforms are just one of the tools I use to guide my investments, not the only thing I rely on,” agreed David Kemmerer, co-founder and CEO of CoinLedger. in an interview.

Experts agree that social media is valuable in gauging investor sentiment and acting as a complementary tool to your overall crypto investment strategy. However, one must remain cautious and understand that too much hype is rarely a good thing.

Social media posts aren’t necessarily subject to the same rigid disclosure regulations that other financial media are, so things like market manipulation and conflicts of interest can also enter the conversation.

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