The Social Aspects of Crypto are the Market’s Biggest Pitfall

  • The lure of social media is a big trap for crypto investors, experts say.
  • Research shows that online communities and FOMO encourage investors to take excessive risks.
  • The effect is magnified by famous icons and CEOs, whose comments can distort perceptions of value and risk.

Tiffany Fong, a retail crypto investor, has mostly ignored her losses from the great crypto crash of 2022 at this point, but she still remembers the sting of embarrassment upon finding out that she had lost a small fortune. His money was locked up in the old crypto exchange Celsius, worth $200,000 at its peak. And then came the crash.

“It’s embarrassing, just because I’ve been in crypto for so long,” Fong told Insider. “It was a very novice decision to put so much into a centralized platform rather than my own cold storage wallets.”

She is not alone. Countless letters have been sent to the Southern District of New York from Celsius clients who say they were misled by CEO Alex Mashinsky’s numerous public statements that Celsius was safer than other investments.

“Celsius was sold to the public as an ultra-safe place to deposit and take out loans by Mr. Mashinsky. He continually said collateral was safe and Celsius was a better and safer place to do business than traditional banks. “, a letter to a client reads.

Social media and the very public nature of crypto add to the allure – and danger – of the space, in part because crypto companies often leverage popularity and a sense of community to win new investors. . This may cause enthusiasts to care more about what crypto represents socially, as opposed to risking their money. So when companies fail, the blow to their investment can be felt as a blow to their identity.

Crypto “communities”

Even investors who consider themselves knowledgeable about the market can fall into the social traps of crypto. Fong said she felt personally misled by influencers who endorsed Celsius on their social media accounts, which gave the platform some credibility in her eyes.

“At first I was a bit skeptical [of Celsius] … If it’s too good to be true, it probably is,” Fong said. “But I was just like, well, they’re smart and they know what they’re doing and they don’t have had no problem. So I said sure, I’ll try.”

Research by Uptal Dhlokia, a marketing professor who studies consumer psychology at Rice University, shows that social pressure within a community — like the popular Wall Street Bets subreddit — can lead investors to invest in particularly risky projects that they otherwise would not have supported.

“They tend to form this sense of community and a sense of belonging to these groups of people who are complete strangers,” Dhlokia told Insider. “And they come to believe that they will be supported by this community of strangers, if things go wrong.”

The costs of this belief are high. Celsius owes $4.7 billion to its users, which include creditors but also customers whose money was blocked when the company became insolvent. In court letters, many customers have given up on the prospect of getting anything back, lamenting the sense of community they once felt.

“I have always been a very conservative investor and have invested for [Celsius] ONLY, because Alex Mashinsky continuously declared, every Friday, that they were safe,” wrote one user, referring to the Ask-Me-Anything sessions the GM held with the Celsius community. “I’m embarrassed, sad and angry,” says the client.

A 2021 article on the psychological motivations of crypto traders notes that crypto is inherently influenced by social pressures, one of the most important being the fear of missing out. Digital assets appeared in the world at the same time as social media, so it is natural that they are intertwined.

And social media activity can directly influence the price of cryptocurrencies by prompting investors to take action, study co-author Paul Delfabbro told Insider, citing the 2021 meme stock craze as example of a similar phenomenon.

“Young people with the audience were actively [pitching] the next meme token to their followers and the price of the token would go parabolic in a few days and then crash,” he said.

According to data from social analytics site LunarCrush, social media mentions of bitcoin are almost perfectly correlated to fluctuations in its price, with some correlation also seen with social mentions and the price of ethereum and Voyager Token.

LunarCrush chart of the correlation between social media and bitcoin

Bitcoin price volatility shares a near-perfect correlation with social media mentions of the token, according to social media analytics site LunarCrush.

Lunar Crush

All the social siren calls and influencer pumping are amplified by the many luminaries and icons of the crypto industry, whose statements can distort how people perceive value and risk.

Celsius’ Mashinsky hosted weekly Q&A events on YouTube, where he regularly touted the security of the company’s loan product, while Terra’s Do Kwon cultivated a Twitter persona steeped in angry memes and comments.

Cory Klippsten, a crypto veteran and managing director of trading app Swan Bitcoin, is a critic of glorified crypto executives like Mashinsky and Kwon — who, before their companies implosed, enjoyed the status of minor celebrities.

The desire to elevate CEOs and founders to icon status can blind users to the potential risks of their investments, Klippsten said. And often they are distracted from their own financial interests by a narrative of popularity and social status.

“Luna’s Financial Incentive [was] to glorify Do Kwan. It’s up to all bag holders to claim he’s the smartest young founder they’ve ever met,” Klippsten told Insider. “What you had was an incentive for the entire Celsius community to hijack the look when you see all those red flags on Mashinsky. They’re constantly tricked into fooling themselves into thinking that this thing they have is awesome.”


Comments are closed.