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

Top social media influencers — from celebrities to self-anointed financial “experts” — use their digital platforms to tout cryptocurrency investments to their numerous followers. Collectively, their influence can convince investors to steer significant sums to various crypto tokens or other cyber assets.

It’s only natural to ask, then, how does their investment advice stack up?

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

It’s perhaps no coincidence that the Securities and Exchange Commission on March 22 announced actions against eight celebrities for illegally touting crypto-asset securities TRX and BTT for failure to disclose they were compensated for doing so. Those names included actress Lindsay Lohan, social media personality Jake Paul, and rapper Soulja Boy. Most of the celebs 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 offer and sale of crypto asset securities and other charges. And last October, Kim Kardashian, one of the most widely followed celebrities, was among the first celebrities charged with failing to disclose she received payment for her promotion of crypto asset security EthereumMax, which she settled for $1.26 million in penalties.

Until now, cyber assets and other alternative investment vehicles like NFTs have largely operated as if they were outside 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 filed against founder Sam Bankman-Fried.)

Findings in our research paper answer your next  question: “Why should we care about what social media personalities tweet about cryptocurrency?” Because an awful lot of likely young or inexperienced investors are duped into buying crypto assets based on recommendations from influencers, financial and otherwise, where they lose money while promoters pocket the profit. 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 this loss stemming from social media platforms.

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

One 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 crypto securities for the two years spanning through 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-run returns. However, these investment gains quickly fade away. Returns begin to decline substantially in the first five days after the tweets. The mean return from day two through five is -1.02%, suggesting that more than half of the initial gains are eliminated soon after the tweets. Moreover, at longer horizons, 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: Crypto-influencers, on average, provide non-profitable investment advice.

Three other points to note from our research:

One: Influencers may have a poor record regarding backing crypto investments, but self-described experts are even worse. Roughly 58% of our sample were influencers who described themselves as financial professionals and experts — and have large numbers of followers who trade 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 sell it quickly when the resulting buzz raises the price for a short time. However, there are also less nefarious interpretations of our findings. For instance, influencers may 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: Although social media can be a vehicle for crypto misdeeds, it’s also important to remember its positive role. Social channels promote information sharing among investors who otherwise might be making investment decisions in the dark. Recent research documents positive impacts of social media platforms on retail investors in equity 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 harm investors; charlatans do.

It’s a good sign that regulators are finally putting the hammer down on influencers who use their fame to sell crypto products without disclosing conflicts. Despite allegations for 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 levied for investment misconduct in the traditional investment arena.

The SEC should continue prosecuting celebrities and potentially increasing 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 writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.