Information Cascades in Cryptocurrency Markets
(How Elon Musk’s Twitter activity moves cryptocurrency markets by Lennart Ante)
This academic paper discusses to what extent Elon Musk’s Twitter activity affects short-term cryptocurrency returns and volume, showing the significant impact that the social media activity of influential and well-known individuals can have on cryptocurrencies. The study analyzes a selection of Musk’s six recent cryptocurrency-related Twitter activities. Some of these events that resulted in huge increases in trading volumes and large positive abnormal returns are Musk’s Twitter bio change to #bitcoin which resulted in a significant cumulative abnormal return of 18.99% in 7 hours and Musk’s tweet One word: Doge resulted in a significant cumulative abnormal return of 8.17% over a short period like 1 minute and peaked at 17.31% over one hour. Ante mentions that although Musk’s bio change to #bitcoin was a sign of support for Bitcoin, his tweet One word: Doge was admitted to be a joke by Elon Musk himself. Considering the joke made by the world’s richest men’s resulted in such a significant market reaction, this illustrates the impact of influential individuals on cryptocurrency markets.
The paper connects perfectly to the concept of information cascades we learned about in class. The core concept of the paper, that individual tweets can have a significant influence on returns and trading volumes of cryptocurrencies, can be thought of as a very large information cascade. In class, we discussed that when people are connected by a network, it becomes possible for them to influence each other’s behavior and decisions. Then we discussed the fundamentally different classes of rational reasons why you might want to imitate what other people are doing. In the context of this paper, Elon Musk’s tweets influence his followers that are connected by a social network, which is Twitter. The information cascade started when Twitter users who viewed Musk’s tweet, and other Twitter users’ reactions to it, decided to follow the crowd. This affected return and trading volume of the corresponding cryptocurrency significantly in the following minutes and hours. The people are involved in this cascade since the actions of others were affecting their payoffs and therefore, they wanted to get a direct benefit by aligning their behavior with the behavior of the majority. This is a very powerful real-world example of a concept that we’ve covered in class.