The internet has taken the new role of community through online groups where youth congregate to interact, exchange ideas and pursue interests. As they engage in self-expression and self-presentation online, it is important to understand how virtual identity is negotiated and formed in those spaces. This research analyzed online group interaction and the development of virtual identity among the youth in Nairobi County. The objectives guiding the study were: 1) To establish the extent to which the youth are part of online groups. 2) To establish the reasons that influence the youth to join online groups. 3) To determine the extent to which online group membership develops the virtual identity of the youth. The independent variable in the study is online group interaction while the dependent variable is virtual identity development. Review of literature in this research is based on various aspects of online group interaction in relation to its potentiality in forming the virtual identity of group members. The communication theory of identity (CTI) and uses and gratification theory (U&G) were adopted to form the theoretical framework for this research. The study employed a mixed method research design in which the main methods used in data collection included; Self-administered questionnaires, Focus Group Discussions, and In-depth interviews. This study comprised four focus group discussions of ten members each sampled from two Universities in Nairobi County, a young professionals group in Kasarani sub-county and a youth support group in Mwiki Nairobi, County. Eight social media experts were interviewed. A cross-sectional survey targeting the youth was conducted in two Universities in Nairobi in which 384 questionnaires were administered to the targeted respondents. The data collected was analyzed qualitatively and quantitatively based on the themes derived from the objectives of this study. Quantitative data was analyzed using the SPSS software, while the qualitative data was analyzed using the NVIVO software. The three-dimensional identity model by Crocetti, Rubini, & Meeus, (2008) was also used to analyze objective three of this study. Findings revealed that the independent variable of online interaction influenced the performance of users online leading to the development of a virtual identity that they are associated with. Equally the reasons for interaction online such as bonding and bridging influence the kind of self-expressions that the users exhibit online thus characterizing their virtual identity. The study concluded that because the youth are engaging online, they are performing ever-changing identities. There is therefore a need for them to be guided for positive outcomes. Equally the study made the following recommendations, firstly, online group interactions could be used positively as a platform for social interaction and change. Secondly, more online groups that address youth related matters should be created as a way of addressing this transitional stage in life. The study suggested further research in rural context and the adult segment.