If Twitter is the Kingdom of Lies, then Bitcoin is the Currency of the Realm*
Recent studies — and recent news stories — make clear the interest in and value of cryptocurrencies like Bitcoin are driven less by actual substance and more by the excesses of the media, social or otherwise.
Platforms like Twitter, Reddit — and “it” crypto social messaging app, Telegram — work as megaphones for often badly conceived ideas, barely substantiated claims and more than a little disagreement between evangelists and skeptics.
In the era of peak-influencer marketing where a couple of well-placed comments can engage and enrage partisans from all sides it shouldn’t be a surprise there’s a financial bubble as audacious as the one enveloping blockchain, cryptocurrencies, and the once-booming, yet now-busting Initial Coin Offering (ICO) craze.
Now, while the proliferation of fake news and conspiracies on social media platforms has been reported on ad nauseam by the press and debated at the highest levels of government in capitals across the globe, some of the most spurious claims on social media can quite easily move massive amounts of the other kind of capital.
In a study published in March, researchers at the Stevens Institute of Technology, working in conjunction with the University of Cincinnati, Dickinson College and Ivey Business School, found the first true correlation that not only does Bitcoin’s price respond to favorable mention on Twitter, but a decidedly small number of influencers’ posts have an oversized impact on the cryptocurrency’s price.
“This was the first robust statistical finding to verify that social media and Bitcoin prices are actually linked,” said Feng Mai, an assistant professor of information systems who led the study. “It may be intuitive, but positive sentiment moves Bitcoin prices.”
However, the fact that about 40% of all Bitcoins rest in the hands of about 1000 people, or “whales” — believed to be early investors in the digital currency — should be enough to give any cautious investor pause.
Let’s be clear, legitimacy remains elusive for all cryptocurrencies. At present, both the public and private sectors have resisted mass adoption; what cryptocurrencies lack in stability they make up for in almost comical volatility; they are open to security breaches, and most, like Bitcoin, can have their value manipulated by previously mentioned whales moving or selling off their coins.
Attempts to peg the currencies to legal tender (or “fiat” as the crypto cognoscenti refer to cash) and create “stablecoins” have, however, gained some traction. The highly controversial Tether and the newly minted Gemini and Paxos’ trust companies’ cryptocurrencies are all digital assets pegged to the US dollar, and all promise to be a “hedge against … volatility.”
Yet while Tether plays out like another dodgy cryptocurrency scam, both Gemini and Paxos have reached approval with New York State regulators. “These approvals,” said New York State Department of Financial Services Superintendent Maria Vullo, “demonstrate that companies can create change and strong standards of compliance within a strong state regulatory framework that safeguards regulated entities and protects consumers.”
Whether cryptocurrencies become legal tender, investible digital “securities” or remain the preferred platform for criminal transactions, organized or otherwise, remains to be seen. Greater minds than mine continue to argue the merits of Bitcoin, and by default, most cryptocurrencies, with skeptics declaring it a disaster, while evangelists post robust data-laden rebuttals.
The economics of cryptocurrencies are arcane. Like the credit default swaps that led to the Great Recession of 2008, they’re products created by financial types driven by one agenda: “How can we make money?”
It’s assumed that a cryptocurrency like Bitcoin — like any currency, really — will be used as a medium of exchange and therefore have a store of value. But unlike gold, natural gas — or even the Euro — in any given week Bitcoin can depreciate faster than a carton of milk barely past its sell-by date.
When it comes to the truth, Twitter is pretty much the last place you will find it.
As much as crypto investors tout the power of a “decentralized currency” while singing the siren song of “mass adoption”, when it comes to the recognized legitimacy of cryptocurrencies by state and private financial institutions, they’re of two minds: Recognition has its perks, but too much recognition can lead to unseemly regulations, or worse, investigations.
Take Goldman Sachs’ recent “bait and switch”. One day there’s a seat at the trading desk in the offing; the next? There’s no truth to the rumors, we’re just good friends. The response? Cryptocurrency prices went into a tailspin.
Less than a week later, a federal judge ruled that ICOs can and should be viewed as securities, opening an innumerable number of dodgy ICO offerings to the possibility of being investigated and prosecuted for fraud.
It’s times like these where the exuberance of the Bitcoin enthusiasts on Twitter should be viewed with renewed skepticism. When it comes to financial fraud, there’s nothing new under the sun; God knows crypto enthusiasts didn’t create “pump and dump”, but cryptocurrency’s unregulated market coupled with the unchecked speed and power of social media has weaponized it.
As a study from MIT published earlier this year made clear, when it comes to the truth, Twitter is pretty much the last place you will find it.
In the study, researchers analyzed 126,000 articles Tweeted by 3 million users more than 4.5 million times over a ten-year period only to discover by “every common metric, falsehood consistently dominates the truth on Twitter.” The study found that “fake news and false rumors reach more people, penetrate deeper into the social network, and spread much faster than accurate stories.”
To be clear, the study revealed that the top 1% of false news stories “diffused” through 1000 people reached up to 100,000 people whereas true stories barely made it beyond the reach of 1000 Twitter users.
Twitter’s track record hasn’t improved over the last year, either, despite very public mea culpas, Congressional hearings and TV news interviews by Co-founder and CEO Jack Dorsey.
In a recent Stanford University study, researchers found that “(f)ake news interactions increased steadily on both (Facebook and Twitter) from the beginning of 2015 up to the 2016 election.” However, following the election while Facebook’s fake news engagements dropped by more than 50 percent, the dissemination of fake news on Twitter increased. And as recently as last month, Twitter’s algorithm continued to recommend fake cryptocurrency accounts and spam bots to users who had an interest in cryptocurrencies.
So, this begs the question: Are fake crypto spam bots any better or any worse than real Bitcoin enthusiasts? I mean, Bitcoin developers can’t even be trusted to be forthcoming about systemic problems: (“Bug, what bug?”)
In the Bitcoin/Twitter study, published in the Journal of Management Information Systems, Mai and his fellow researchers discovered that among Bitcoin enthusiasts there was indeed a “silent majority” whose Tweets and postings on respected industry forums like Bitcointalk.org had a definite, positive influence on the price of Bitcoin. At times seeing the coin’s price increase 10-fold.
“This was a big finding,” Mai said in a statement, “and it does seem to prove that people are trusting the silent majority much more, perhaps because they do not seem to have an agenda.”
Mai and his colleagues conducted a fascinating study; they separated out the relatively small number of people who posted frequently about Bitcoin to remove any perceived inherent bias of this “vocal minority”, and they focused on the more reserved Tweets of the “silent majority”.
However, the study never addressed the larger question: Were the positive Tweets by the silent majority actually true?
Sure, the “silent majority” posted less, but were their posts any less false or over-inflated than those of the “vocal minority”? While we’ve learned that positive sentiment moves the Bitcoin market, we never learn if the positive sentiment is based on factual data, wishful thinking, or out-and-out lies.
Blockchain is an incredibly powerful platform, that, if implemented correctly, could revolutionize numerous industries while drastically changing the composition of the global work force. Many accounting, legal, logistics and finance operations roles, all once managed by people in entry-to mid-level jobs would in many cases, no longer exist.
Imagine… a world with fewer lawyers.
But right now, cryptocurrencies are hot! Hot!! HOT!!! And the distributed ledger’s true potential is obscured by the ‘get rich quick’ ethos of crypto-mania. Like the madcap early aughts when the first digital boom ushered in“day trading”, there will be far more losers than winners.
Whether Bitcoin becomes the gold standard of cryptocurrencies, adopted by the masses with an ATM on every corner and “Bitcoin Welcome” logos in bodega windows from Manhattan to Madras, remains to be seen. The average cost of a single Bitcoin transaction over the last year was between US$75 and US$160. And you think an out-of-network ATM fee is expensive?
But all may not be lost for Bitcoin; while “irrational exuberance” and wishful thinking about the coins’ actual worth may increase their value, a new study from the Bank of International Settlements shows that investors—and the cryptocurrencies—responded favorably to real news about government and financial markets’ attempts to regulate cryptocurrencies. (Probably not what the mysterious Satoshi Nakamoto had in mind when he wrote his white paper, but isn’t that where Libertarian dreams always look their best? On paper?)
Blockchain will have longer legs. True, at present all blockchain-based projects suffer from the same systemic issues cryptocurrencies face — scaling, energy costs and speed — but a majority of the problems they’re attempting to solve, technologies they hope to replace and revenues they hope to create are by and large, real.
And that, fundamentally is Bitcoin’s problem.
Unless the cryptocurrency’s true value and viable commercial use can be proved to be more than at best, wishful thinking, or at worst, outright lies promoted on platforms like Twitter, Bitcoin and the promise of cryptocurrencies will burst just like all the other overinflated false economies that have come before it—collectibles, Japanese real estate in the ‘80s, the dot-com bubble, and, yes, even tulips.
*This story has been updated to include recent studies of public sentiment about Bitcoin and other cryptocurrencies. ADC