Chasing followers makes crypto traders perform worse on social investment sites

Whether excited about gaining new followers or desperate to win back lost subscribers, investors who saw changes to their subscriber count performed worse than before their subscribers changed, according to a new study.

The research tracked performance on social investment sites, where individuals can trade assets like cryptocurrency while attracting audiences based on their performance—like YouTube, but for investments.

Both gaining and losing followers led investors to make more frequent, riskier trades. The upshot is that traders performed about 10% worse in the weeks after their subscriber counts changed.

“If the number of followers increases a lot, it creates an overconfidence effect. You are more aggressive in trading, and your future trading performance will be worse,” said Liangfei Qiu, Ph.D., a professor in the University of Florida’s Warrington College of Business and co-author of the new study forthcoming in the Journal of Management Information Systems and available on the SSRN preprint server.

“So logically we thought that if more followers leads to worse performance, then if we reduce the number of followers, it will reverse the effect, reduce overconfidence and lead to higher trading performance,” Qiu said. “But that’s not what we found. If we reduce the number of followers, they trade even more aggressively and their trading performance becomes even worse.”

Qiu and his collaborators at the University of Maryland and University of Washington worked directly with an anonymous social trading platform to examine the impact of gaining or losing followers on traders’ cryptocurrency trading behavior and performance.

The research revealed the power of social pressure. This study was focused on cryptocurrency, which is highly volatile and may exacerbate the risk of social trading. But social trading also exists for traditional investments like stocks and bonds, and chasing followers could hurt these types of investments, too.

The researchers say that both platforms and investors should guard against the downsides.

“If platforms emphasize the social functions too much, it might backfire. Eventually it will hurt the long run performance of the platform,” he said. “The investors should realize their inherent bias and make sure their trading strategies are not too affected by social attention.”