Influence of social networks on financial markets
Social media can have a significant—sometimes
critical—impact on the reputation of public companies and their quotes.
Influencers in the cryptocurrency space frequently have a considerable
influence on the value of cryptocurrencies. For more information, read the
article.
In modern conditions, social media create an
environment in which the principles of interaction between people are
fundamentally changing. Today, everyone can instantly interact with a lot of
people via social media—which can have a significant effect on the reputation
of public companies and their quotes.
First
calls, and dive deep into the story
The first case that exposed the potential threat
of social media to the financial industry occurred in 2013. At 1:08 p.m. on 23
April, a fake tweet from a hacked Associated Press account stated, ‘Two
explosions at the U.S. White House, Barack Obama injured.’ Stock prices
immediately plummeted, wiping out the value of the S&P 500 by more than
0.9%, or $130 billion, in less than three minutes. This was the first such case
on Twitter, and as is often the case on Twitter, it was brief and superficial.
The Associated Press itself was quick to clarify the false nature of these
messages, and the White House confirmed it, and the markets recovered the next
day.
Social
media as a political tool
Another striking example of the impact on
financial markets through Twitter is the messages of the former U.S. President,
Donald Trump. He used his Twitter account to report crucial economic news and
repeatedly threaten Chinese officials with tariff hikes, at times causing
market and investment turmoil.
According to Bank of America Merrill Lynch, U.S.
stocks have tended to fall on days when Trump tweets more than 35 times and
rise on days when he tweets less than five times. JPMorgan even created ‘Volfefe
Index’, playing off
Trump’s viral typo ‘covfefe’ he tweeted in
2017, to track market movements in response to the president’s social media
activity. During Donald Trump’s most significant social media activity,
JPMorgan noted that ‘tweets have
increasingly moved U.S. rates markets immediately after publication.’
‘There
is indeed a correlation between trader sentiment, which can be evaluated based
on tweets, and market movements—a 1% increase in the ‘negative sentiment’
indicator is followed by a 0.03% drop in the exchange rate,’ said Kar Yong Ang,
the Octa financial market analyst. ‘However, the effect does not last more than
an hour—the tool is therefore unsuitable for longer-term forecasts,’ he added.
During Donald Trump’s presidency, major
financial conglomerates created particular indices that tracked the correlation
between his tweets and volatility in the U.S. stock market. Now, updating of
these indices is on hold as it has been almost three years since Trump last
tweeted about the news and the economy as a U.S. president.
Previous presidents have not maintained the same
social media presence—and some critics suggest that Trump’s tweets have put
inappropriate pressure on politically independent bodies such as the Fed. It
all resulted in a permanent erosion of central bank independence during Trump’s
term, as investors no longer perceive the Federal Reserve as independent of the
executive branch.
This reinforces that a strong media personality
is an opinion leader and can influence capital markets.
The
impact of social media on cryptocurrency prices
The rise of cryptocurrencies has become a big
deal in recent years, and it’s impossible to overlook how social media affect
market patterns and price movements. Social media has played a significant role
in encouraging the use of cryptocurrencies for payments. Users often share
information about the latest market trends and developments on prominent
cryptocurrency discussion sites, including X (former Twitter) and Reddit.
Influencers in the cryptocurrency space often
have a significant effect on the value of cryptocurrencies, especially minor
altcoins, as followers value their opinions and may decide to invest in
specific cryptocurrencies due to their advice. However, it can also lead to
market manipulation and ‘pump and dump’ scams, where
influencers artificially increase the price of a cryptocurrency before selling
their assets profitably.
Memes are another way social media influences
cryptocurrency prices and market movements. On social media, memes are a common
way of communicating, and memes about cryptocurrencies have been viral in
recent years. For example, the famous ‘To the Moon’
meme is used to convey enthusiasm about the potential of a particular
cryptocurrency.
While memes may seem like innocent
entertainment, they can have a big impact on the value of cryptocurrency. A
certain cryptocurrency may rise in value because of the hype that memes can
generate. However, if the fundamentals behind the enthusiasm are strong, the
promotion may only last for a while, and prices may plummet.
As we can see, the penetration of social media
in the financial world is intense and is only getting stronger every year. In
addition to classical fundamental and technical analysis, a third dimension is
emerging, through which it is possible to track short-term price changes and
use this information as an additional investing opportunity.
About
Octa
Octa is an international broker that has been providing
online trading services worldwide since 2011. It offers commission-free access
to financial markets and various services already utilised by clients from 180
countries with more than 42 million trading accounts. Free educational
webinars, articles, and analytical tools they provide help clients reach their
investment goals.
The company is involved in a comprehensive network of
charitable and humanitarian initiatives, including the improvement of
educational infrastructure and short-notice relief projects supporting local
communities.
Octa has also won more than 60 awards since its
foundation, including the ‘Best Educational Broker 2023’ award from Global
Forex Awards and the ‘Best Global Broker Asia 2022’ award from International
Business Magazine.
