The impact of social media on financial markets: Octa analysis

Social media has the power to greatly affect, and sometimes even determine, the reputation of public companies and their stock prices. In the world of cryptocurrency, influencers play a crucial role in shaping the value of different cryptocurrencies.

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To learn more, please read the article. In today’s modern era, social media has created an environment that is significantly changing the way people interact. Nowadays, anyone can instantly connect with a large number of people through social media, which can have a significant impact on the reputation and stock quotes of public companies.

Initial consequences and deep insight into the story

The first case that revealed the potential threat of social media to the financial industry occurred in 2013. At 1:08 p.m. on April 23rd, a false tweet from a hacked Associated Press account claimed, “Two explosions at the U.S. White House, Barack Obama injured.” This caused stock prices to immediately plummet, wiping out over 0.9% or $130 billion of the S&P 500 value within three minutes. This was the first case of its kind on Twitter, and as is often the case on Twitter, it was short-lived and shallow. The Associated Press quickly clarified the false nature of the tweet, the White House confirmed it, and the markets rebounded the following day.

Social media as a political tool

Another notable example of the impact on financial markets through Twitter is the tweets from former U.S. President, Donald Trump. He utilized his Twitter account to report significant economic news and frequently threatened Chinese officials with trade tariff increases, often causing market and investment turmoil.

Based on Bank of America Merrill Lynch, U.S. stocks tended to decline on days when Trump tweeted more than 35 times and increase on days with less than five tweets. JPMorgan even developed the “Volfefe Index” which referenced Trump’s viral typo, “covfefe,” tweeted in 2017, to track market movements in response to the president’s social media activity. JPMorgan noted during the height of Donald Trump’s social media activity, his tweets increasingly affected U.S. interest rate markets immediately after publication.

“Indeed, there is a correlation between trader sentiment, evaluated through tweets, and market movements. A 1% increase in the ‘negative sentiment’ indicator results in a 0.03% drop in the exchange rate,” said Kar Yong Ang, Octa financial market analyst. “However, the effect doesn’t last more than an hour, meaning the tool is unsuitable for long-term forecasts,” he added.

During Donald Trump’s presidency, major financial institutions created specific indices that traced the correlation between his tweets and volatility in the U.S. stock market. However, updates to these indices have been put on hold as it has been nearly three years since Trump last tweeted about news and the economy as a U.S. president.

Previous presidents have not maintained the same level of social media presence, and critics argue that Trump’s tweets placed inappropriate pressure on politically independent bodies such as the Fed. This resulted in a lasting erosion of central bank independence during his term, as investors no longer perceive the Federal Reserve as independent from the executive branch.

This underscores the fact that a strong media presence can influence capital markets.

The influence of social media on cryptocurrency prices

The popularity of cryptocurrencies has grown significantly in recent years, and it’s impossible to ignore the impact of social media on market patterns and price movements. Social media has played a vital role in promoting the use of cryptocurrencies for payments. Users often share information about the latest market trends and developments on prominent cryptocurrency discussion sites like X (formerly Twitter) and Reddit.

Influencers in the cryptocurrency space often have a substantial effect on the value of cryptocurrencies, particularly lesser-known altcoins, as their followers value their opinions and may choose to invest in specific cryptocurrencies based on their advice. However, this can also open the door to market manipulation and “pump and dump” scams, where influencers artificially increase the price of a cryptocurrency before selling their assets at a profit.

Memes are another way social media influences cryptocurrency prices and market movements. Memes are a common form of communication on social media, and cryptocurrency memes have gone viral in recent years. For example, the popular “To the Moon” meme is used to express enthusiasm about the potential of a particular cryptocurrency.

While memes may seem like harmless entertainment, they can significantly impact cryptocurrency values. A specific cryptocurrency may experience a price surge due to meme-generated hype. However, if the underlying fundamentals do not support the hype, the increase may be short-lived, and prices may plummet.

As we can see, the influence of social media in the financial world is extensive and continues to strengthen year after year. Alongside traditional fundamental and technical analysis, a third dimension is emerging, allowing for the tracking of short-term price changes and utilizing this information as an additional investment opportunity.

Octa

Octa is an international broker that has been offering online trading services globally since 2011. They provide commission-free access to financial markets and a range of other services to clients from 180 countries, who have opened over 42 million trading accounts. Their free educational webinars, articles, and analytical tools are designed to help clients achieve their investment goals.

The company is involved in an extensive network of charitable and humanitarian initiatives, including enhancing educational infrastructure and supporting local communities through short-notice relief projects.

In the APAC region, Octa has been recognized with the ‘Best Forex Broker Malaysia 2022’ award by Global Banking and Finance Review and the ‘Most Reliable Broker Asia 2023’ award by International Global Forex Awards.

In Singapore, Octa has received the ‘Broker with the Fastest Withdrawal Singapore 2023’ award from International Business Magazine and the ‘Most Secure Trading Platform Singapore 2023’ award from World Business Outlook.

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