Market participants in both traditional and digital finance often act emotionally. Fear and greed can therefore be potent drivers for market decisions, which are accentuated through posts on social media. A scientific analysis of the phenomenon.
The value of Bitcoin against the USD has increased by an average of 130% per year between January 2013 and 2023. Success attracts private investors. They often gather information about trends through social media channels like Twitter and are influenced by the prevailing sentiment.
When a price rises sharply without a fundamental cause, the non-fundamentally driven downside potential also increases. High volatility is a characteristic of the still young market. The majority of private investors struggle with this pressure. The natural tendency of humans to be guided by emotions leads to newcomers often paying the highest prices at the end of an upswing and selling these positions at a loss in fear of a total collapse during a price correction. A condensed version of the scientifically based working paper titled "Bitcoin - How Social Media Influences Private Investors in Their Actions."
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You could be a millionaire today
"If only you had invested a few hundred Swiss Francs in Bitcoin in 2013, you could be a millionaire today," a participant cheekily admitted during the data collection. To be considered a Bitcoin millionaire today, you would need 40 Bitcoins, which at the current price of 25,000 CHF per coin. Ten years ago, these 40 Bitcoins were available for approximately 800 CHF (20 CHF per coin).
The enormous gains in value are the strongest narrative that lures private investors into the market. The danger is that the sentiment escalates during bullish phases. The most widespread type of content consists of positive price predictions. These generate clicks and have the potential to trigger FOMO (Fear of Missing Out), tempting private investors into impulsive purchases. An example of a typical tweet aiming to generate reach:
#Bitcoin Price Predictions:
JPMorgan: $130k
Citibank: $318k
ARK Invest: $400k
Guggenheim: $600kCurrent price: $59k
— Bitcoin Archive (@BTC_Archive) April 5, 2021
Critical examination of posts is necessary
The extent to which an individual reacts to positively or negatively connotated information during a period of strong price decline, and whether an action arises from it, depends on the motives and experienced emotions of the recipient, as well as the behavior of the consumed influencers.
The Uses and Gratifications approach assumes that recipients choose the medium that best satisfies their needs (motives). The concept of involvement describes how a recipient can still engage with the content days after reading an article, especially if the person is directly affected by the developments. However, this does not mean that attitudes can be changed sustainably. The more involved an evaluating individual is in a topic, the less it can be influenced by persuasion from other opinions. The interplay between the emotions of "greed" and "fear" and the resulting experienced tension diminishes over time and with experience. If a recipient primarily follows influencers with valuable communities, they are less susceptible to making irrational decisions. However, in doing so, one must separate "the garbage from the good sources" through independent research.
Manipulation through media is by no means a new phenomenon, and media history shows that it is difficult to eliminate through regulation. Social media accelerate the impact of posts and expand the scope of influence, thereby accentuating the problem. My goal is to motivate critical examination of the media. The ability to critically engage with media and one's own emotional reactions is of considerable benefit in all areas of life.
