While we understand well how social media channels sway consumers, there is little understanding of their influence on online trading behavior. We argue that social media are creating a new class of self-directed online traders by simultaneously encouraging and biasing trading decisions. Through an empirical study, we show that heavy social media users are more likely to engage in online trading but are largely affected by online herding behavior, and are four times more likely to blindly follow other traders. Bloggers, influencers, social network contacts, and social media news shape these users’ online trading behaviors. As online traders influenced by social media are unlikely to receive adequate returns, companies face an ethical dilemma: They could leverage social media to efficiently access funds but they risk inappropriately exploiting the inexperience of online traders biased by social media. We offer a set of nine practical recommendations for organizations to respond to these new challenges.

The impact of social media on trading: The rise of online traders

Bitcoin and cryptocurrencies represent a fascinating and timely case to study. A bitcoin traded in July 2010 for just $0.06, in January 2017 for $900, and in December 2017 for $19,700. In 2010, $100 invested would have turned into over $30 million in 2017. By the end of 2017, there were over 1,300 cryptocurrencies with a market capitalization of about $587 billion and $500 billion daily volume of online transactions. After reaching their peak, the cryptocurrencies’ prices started dramatically fluctuating and bitcoin’s price dropped from $19,000 to about $5,000 in just a few months. One possible reason for both the performance and risk of cryptocurrencies is the effect of social media on online trading, which started from the beginning. The creator of Bitcoin, Satoshi Nakamoto, published a white paper online, disseminating information in over 500 posts in a social media forum. Bitcoin started attracting interest in 2011 when WeUseCoins published an online video that went viral on social media, reaching 6.4 million views. Social media diffused information about companies accepting bitcoin as payment and about the growth of cryptocurrencies. Garcia, Tessone, Mavrodiev, and Perony (2014) stipulated that the volume of word-of-mouth communications in social media and the volume of information search diffused through social media influenced price growth and fluctuations of Bitcoin. Mai, Shan, Bai, Wang, and Chiang (2018) found that the user-generated content diffused through social media had a significant impact on Bitcoin volume of transactions and performance. The cryptocurrency case is an example of how social media can significantly affect online trading, calling for the need to understand the phenomenon.