Yesterday I noted that the price of bitcoin is mostly determined by the perception of bitcoin as good (or bad) digital gold. If the speculators are persuaded that the price of bitcoin will go up, they will buy and drive the price up. Therefore, those predictions of future price movements that go viral and get shared and tweeted lots of times are self-fulfilling prophecies.
This observation is confirmed by a recent study titled "How Does Social Media Impact Bitcoin Value? ATest of the Silent Majority Hypothesis," published in Journal of Management Information Systems. The study was led by Feng Mai, an assistant professor of information systems in the School of Business at Stevens Institute of Technology. The study analyzed a large volume of social media posts and tweets to evaluate the impact of social media on the price of bitcoin.
"This was the first robust statistical finding to verify that social media and Bitcoin prices are actually linked," said Mai in a Stevens press release. "It may be intuitive, but positive sentiment moves Bitcoin prices."
The researchers note that social media has fundamentally changed how information disseminates and has become a valuable source of novel information that fundamentally alters bitcoin evaluations. Therefore, social media act as a channel through which information and expectations become reflected in the price of bitcoin.
The researchers conducted sentiment analyses of 344,000 posts on Bitcoin Forum and 3,4 million tweets using a statistical method known as vector error correction, or VECM, which permits analyzing large-scale systems with dynamic relationships and feedback loops between variables. "Any changes in Bitcoin's price are obviously going to affect the sentiment around it, so we needed to factor in those influences as well," said Mai.
The vocal minority and the silent majority
The researchers found that the impact of social media on the price of bitcoin is driven primarily by the silent majority, the 95 percent of users who are less active and whose contributions amount to less than 40 percent of total messages.
"Vocal users of social media may sometimes have a certain agenda, in this case hyping or boosting the price of Bitcoin because they themselves have invested in it," explained Mai. "So, if most of the social messages around Bitcoin are generated by people who are biased, the sentiments on social media may not accurately reflect the currency's actual value."
"We wanted to know who is affecting the price: a vocal minority, who may be biased, or the quieter majority, who do not seem to have a reason to be untruthful, or both."
The researchers note that the reactions of the silent majority of mostly inactive users have a larger effect than those of active users, and therefore are a better predictor of future price movements. "Despite the vocal minority dominating social media, the silent majority users’ opinions cannot be overlooked," emphasize the researchers. "More marketing and analytic efforts should seek to identify this 'heavy tail' of the online community."
In fact, most investors are smart enough to realize that the opinions expressed by vocal supporters of Bitcoin are probably biased, and give more weight to the opinions of infrequent posters, who are probably more honest.
"The silent majority are the real influencers in driving the value of Bitcoin," added Mai. "It seems like investors get that."
Picture from Maryland GovPics/Flickr.
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Crypto Insider Editor Giulio Prisco is a writer specialized in science, technology and business. He is persuaded that crypto has the potential to bring disruptive positive changes to the internet and society at large.