The paper’s last revision is only a few days old, and considering the recent shill party in the r/bitcoinmarkets daily threads the information it provides is quite spot on at the moment.
Welcome to Bitcoin
Bitcoin is the ideal asset for studies relating relevant social media activity with price action. We have to communicate via Reddit, Slack, Telegram or forums - there is no other way to stay informed. There are no official media outlets relevant to day traders, no balance sheets and no company disclosures.
Because of this trading forums give us the best chance to discuss ideas with everyone else, but it is a double edged sword: With no official truthtruthtruth the potential for manipulations and self-fulfilling prophecies is also great.
The value providers
“Social communication causes information free riding and hurts information production. The result is a decreased fraction of informed traders in the network.”
For this study people from Georgia Tech Scheller College of Business scraped content of price speculation boards on bitcointalk.org from between years 2012 and 2016. They regrouped the posts to see how they thread, who starts threads, who mostly quotes and how well are the individual discussions interconnected. They also monitored the overall posting activity which is predicting near term trading volumes: posting starts to rise when a new information shows up. Consequently, people trade that information and daily volume goes up.
One thing is clear - not everyone who posts on forums provides information, let alone a valuable one. It turns out that users can be divided into those who post their own threads and those who mostly quote them.
People who post new threads that initiate a lot of discussion usually point out some new information - these people provide the value. Next day price action even correlates with the tone of their posts: if an influential user posts something negative in tone a drop on the bitcoin price is likely in the short term.
It appears that for an influencer it is not difficult to manipulate the rest of the forum users to do his bidding. However that is not happening if the community is in its healthy state.
Instead, in the healthy environment the influencer posts an idea which leads to discussion where people actually do their own research to validate or disprove that idea. They might be trading the information while users who participate exclusively on other boards have not read about that idea at all. They could have arrived to the same conclusion or another one and might have posted about it in their own community but they are not aware of what is happening on other forums. This is the ideal way where statistically forum users tend to be right in their predictions of bitcoin price.
Troll, year, good, shit, guys, stupid, lol. That’s bitcoin price discussion for you.
The second group of the people are the reactionary forces. They matter the most when it comes to spreading information (and misinformation) because they quote the influencers and paraphrase their ideas on different boards with no original insight added. This way a speculation can spread across several social networks.
People who quote and requote are linking different networks together, asserting the same single information all over the place. If validating this speculation is too difficult most people will simply not bother. That leads to a situation where most of the traders are working with the same speculation - essentially they are voluntarily staying uninformed. Instead of research, traders keep passively listening to the same information from everywhere and gradually start agreeing on it. The speculation becomes taken for truth. The rare ones who try and do their own research are outliers in this situation. They will get shunned away because they are “in denial” and “cannot face the truth”.
In such conditions the traders who are willing to put in the work to find information about the bitcoin market will keep their findings to themselves.
Meanwhile the others are trading the “confirmed fact” and typically don’t consider the market in an unbiased way. These people might miss a fact the market presents to anyone who would bother looking. At the same time they are the only ones still posting on forums: here the predictive power of the forum goes south.
Hell is the nice way
The paper concludes in an interesting way, claiming that to retain the predictive powers of online bitcoin price discussions the forums have to stay away from the hippie heaven where everyone is agreeable, supportive and trusting.
“When a new link [between different networks] is created, it improves the access to new information and decreases the incentive to contribute. Hence, overall welfare can be higher when there are structural holes in the network”
Holes in the connection between forums and also imperfections in hierarchy motivate people to not blindly trust anyone, do their own research and make an argument. This consequently keeps the bitcoin boards in touch with reality.
Source (DOI) Xie, Peng and Chen, Hailiang and Hu, Yu Jeffrey, Network Structure and Predictive Power of Social Media for the Bitcoin Market (March 7, 2017). Georgia Tech Scheller College of Business Research Paper No. 17-5. Available at SSRN: https://ssrn.com/abstract=2894089 or http://dx.doi.org/10.2139/ssrn.2894089