In this article we will take a look into how to unlock the power of media psychology to navigate the irrationality of fear and greed on Twitter. This article presents the scientifically based working paper entitled “Bitcoin – How social media influence private investors in their actions”.
Bitcoin is digital gold: the supply is fixed and thus the harder monetary asset than classic fiat currencies. Its value against the USD increased by an average of 230% per year between 2011 and 2021, making it the most successful asset class in the world. Success attracts private investors. These often find out about trends via social media channels such as Twitter and are influenced by the prevailing sentiment. Barriers to entry are low. Everyone has quickly created a Bitcoin wallet and is part of the movement.
When a price rises sharply for no fundamental reason, this increases the downside room to maneuver, which is also not fundamental. The high volatility is a characteristic of the still young market. The majority of private investors cannot cope with this pressure. The natural human trait of being guided by emotions means that new entrants often pay the highest prices at the end of an upswing and sell these positions at a loss when prices correct, in fear of a total collapse.
In order to understand one’s emotions when dealing with the volatile asset Bitcoin, I wanted to connect the background and correlations of money and media psychology using models, theories, and historical context. Since there is (almost) no literature on this topic, I used my bachelor thesis to conduct research on this problem using qualitative data collection (expert interviews). The working paper now published on Zenodo (Translation in EN ) represents the essence of the more than 100-page bachelor thesis.
You could be a millionaire today
“If you had invested a few hundred francs in Bitcoin in 2013, you could be a millionaire today,” one interviewee mischievously stated during data collection. 40 Bitcoin are needed at today’s price of CHF 25,000 per coin to call yourself a Bitcoin millionaire. 10 years ago, these 40 Bitcoin could be bought for around CHF 800 (CHF 20 per coin).
The enormous price gains are the strongest narrative drawing private investors into the market. The danger, sentiment builds during bullish phases. From March to April 2021, after a sharp rise in prices, 110 posts with the keyword “bitcoin” and over 500 “likes” were analyzed. 97 reported positively, seven neutrally, and only six skeptically. The most common post type is positive price predictions. These generate clicks, have the potential to trigger FOMO (Fear of missing out) and entice private investors to make rash purchases.
How strongly an individual reacts to information with positive connotations, or in a phase of strong price decay to information with negative connotations, and whether an action results from this, depends on the motive and the experienced emotions of a recipient, as well as the behavior of the influencers consumed.
The uses-and-gratifications approach assumes that recipients choose the medium that best satisfies their needs. Depending on the case, a person seeks information, entertainment, personal identity (reinforcement of one’s own values), or integration and social interaction (exchange among like-minded people). One or more motives are satisfied in the choice of media.
The Involvement concept describes that a recipient can still be involved with the content of an article even days after reading it, if the person is directly affected by the developments or the views represented. However, this does not mean that attitudes can be permanently changed. The more involved a judging individual is in a topic, the less he or she can be influenced by persuasion from other opinions. The interplay between the emotions “greed” and “fear” and the resulting experienced tension becomes smaller over time and with experience.
In today’s globally connected world, it has become increasingly difficult to separate the clickbaters and scammers from the valuable content with strong communities. This means that an investing person who wants to learn about bitcoin on Twitter should first do the work of “separating the junk from the good sources” in their own research. An investment should never be made based on just one opinion or source.
Why are so many so easily influenced?
I let the interviewed professionals answer this central question to open another perspective and to give insight into the empiricism of the working paper:
There are many private investors who have no idea what Bitcoin is and what features it offers and yet hold Bitcoin in their portfolio (Senior Manager at Knowledge Lab AG (Digitization of the Banking Sector)).
Financial education is still far too insignificant a topic among the population. Dealing with money and investments is not taught in school, which is why many market participants lose money with their ignorance and the resulting emotional reactions (Co-founder of House of Satoshi).
If the investment should go into the red, the mood usually tips. But losses and gains don’t materialize if you don’t cash them out. “I claim 9 out of 10 people don’t hold this emotionally. They hold the gains and monetize the losses. That’s where you have to be tough as nails.” A private individual can hardly prepare for these emotional tensions. That’s where everyone goes through who is investing money for the first time. The important thing is to learn from mistakes and experiences made. “There is an age-old wisdom that should be drilled into every private investor: You can never catch two things, the top and the bottom. There will also always be an investment asset that would have yielded more profits” (Former Director of the Swiss Bankers Association).
Conclusion
For me, it crystallized during the conversations that a mixture of lack of financial education, little experience, credulity, emotionality and lack of investment horizon deprives private investors in Bitcoin of their profits, respectively influences them to make irrational decisions. “Simply doing nothing” is historically best in a market that is going up in the medium to long term.
Those who invest (speculate) in Bitcoin to get rich quick will pretty much get their fingers burned. Those who look deeper into the fundamental characteristics will not be easily pushed out of the market by the volatile nature and news situation.
Manipulation via media is by no means a new phenomenon and media history shows that it can hardly be eliminated with regulation. Social media accelerate the impact of contributions and enlarge the sphere of influence, accentuating the problem. My goal is to motivate critical engagement with media, knowing that globally this is a difficult endeavor. After all, the ability to critically examine media and one’s own emotional reactions is of considerable benefit in all areas of life.
For more information about this subject, please feel free to reach out to me on Linkedin or Twitter.