Opinion: all stocks are influenced by news, but cryptocurrency is particularly influenced by social media

By Finn MacleodTalent Garden

The Bitcoin market mania of January 2018 was such that people compared it to Dutch Tulip mania and the South Seas bubble. And it's coming back.

That big bump on the left of the graph below holds many stories. It is the story of the boy who spent ten million dollars on a pizza. Or the man that can still be seen in a landfill site with a metal detector looking for his hard drive which his girlfriend threw out because it was making too much noise (it contained Bitcoin which was worth $80m at one stage). Did anyone predict the price was going to rise that much? More importantly, can anyone predict if it is going to happen again? 

Some early cryptocurrency holders are quite fanatical. It takes a certain zealous type of mind, to watch your investment rise by x100 and then hold for the next x100.  Another class of bitcoin millionaire are the absent minded tinkerers:"I was just playing around with this thing on my computer and ...oh it’s now worth...HOW MUCH?". Then there are the day traders. Every day, they look at charts and adjust their portfolios. It’s almost a religious thing. I’ve seen some use protractors and felt tip pens on their computer screens.

There’s an argument that financial charts (crypto or otherwise) are inherently unpredictable. Suppose you spot a regular pattern in a price; for example, bitcoin goes up against the dollar every Wednesday at lunchtime. Anyone that spots that pattern is then going to buy bitcoin just before lunchtime, and sell after, thus making a profit. But when enough people want to buy, the price of bitcoin before lunchtime is pushed up and this buying pressure causes the original pattern to disappear and so no more profit.

From RTÉ Radio 1's The Business, reporter Liam Geraghty reports on the rise and fall of virtual currencies in June 2018

Looking at past prices to predict future prices is called technical analysis. By the above argument, these patterns are necessarily complex. Otherwise, everyone would be spotting patterns and profit opportunities would no longer exist. More importantly, looking at a line chart to predict future price behaviour is like predicting the score of a football game by only looking at the past scores. You’re leaving out a lot of information, such as the players, the coach and the location of the game, all of which impact the outcome.

In cryptocurrency, this extra information consists of all the parts of the complex ecosystem that make up how a particular cryptocurrency works, such as the demand, the supply and any unique features of that cryptocurrency. In Bitcoin for example, the demand could be influenced by media or a regulatory announcement from a government body.

The supply is defined by the Bitcoin algorithm - capped at 21 million bitcoins, being issued onto the market at a rate which gets slower over time (there are now around 17 million bitcoins released). Bitcoin has a number of unique features which affect its price; for example, the "bitcoin halving" which happens every few years, and is the point at which the amount paid to miners (bitcoin transaction processors) is cut in half. 

From RTÉ Radio 1's Mooney Goes Wild in March 2013, the very first feature on Bitcoin on the station

All stocks are influenced by news, but cryptocurrency is particularly influenced by social media. More traditional markets tend to have more concentrated ownership. When you have concentrated ownership and where institutional money is run by professional managers, decisions are made on the basis of expensive research and private data feeds rather than social media. The people that own cryptocurrencies spend more time online and tend to get their information from forums such as Reddit, Twitter and Telegram or specific cryptocurrency sites, and all of these can drive demand.

This also makes it harder to regulate as the definition of "pumping a stock" is tricky and undefined in the world of cryptocurrencies. Sharing an article about a cryptocurrency on a social forum is not illegal but, if enough of those articles are shared, then that currency will almost always go up in value. When a social account is popular enough, we can track causation between a single tweet and the consequent price spike

Sharing an article about a cryptocurrency on a social forum is not illegal but, if enough articles are shared, that currency will almost always go up in value

Back in April, Elon Musk tweeted one word: "Ethereum". Musk had recently been fined 20 million dollars by the Securities and Exchange Commission for tweeting about the price of Tesla and claiming the stock would be bought out by private investors. That same agency had been deliberating over whether Ethereum was a security or a currency and had recently decided that Ethereum was not a security. The in-joke was that Musk was walking right up to the very edge of the legal line by tweeting "Ethereum". Needless to say, the price spiked.

Dr Finn Macleod is a former research mathematician and entrepreneur who is now director of DistilX.com and lectures with Talent Garden in DCU


The views expressed here are those of the author and do not represent or reflect the views of RTÉ