Is your digital neighbor a reliable investment advisor?

Abstract

The web and social media platforms have drastically changed how investors produce and consume financial advice. Historically, individual investors were often relying on newsletters and related prospectus backed by the reputation and track record of their issuers. Nowadays, financial advice is frequently offered online, by anonymous or pseudonymous parties with little at stake. As such, a natural question is to investigate whether these modern financial "influencers"operate in good faith, or whether they might be misleading their followers intentionally. To start answering this question, we obtained data from a very large cryptocurrency derivatives exchange, from which we derived individual trading positions. Some of the investors on that platform elect to link to their Twitter profiles. We were thus able to compare the positions publicly espoused on Twitter with those actually taken in the market. We discovered that 1) staunchly "bullish"investors on Twitter often took much more moderate, if not outright opposite, positions in their own trades when the market was down, 2) their followers tended to align their positions with bullish Twitter outlooks, and 3) moderate voices on Twitter (and their own followers) were on the other hand far more consistent with their actual investment strategies. In other words, while social media advice may attempt to foster a sense of camaraderie among people of like-minded beliefs, the reality is that this is merely an illusion, which may result in financial losses for people blindly following advice.