Explained: Why cryptocurrency jumps and falls on Elon Musk’s tweets | Business Standard News

lipped from: https://www.business-standard.com/article/markets/explained-why-cryptocurrency-jumps-and-falls-on-elon-musk-s-tweets-121051801378_1.html

The value of a crypto depends solely on the equation between supply and demand, and demand is driven solely by sentiment

Elon MuskElon Musk’s Twitter account has over 55 million followers

What does Elon Musk do for entertainment in between building spaceships and hyperloop systems and running an autonomous electric vehicle business? He fools around with cryptocurrencies.

Every time the charismatic billionaire has made a statement about crypto, he’s sparked off financial turmoil. This is partly because he controls two industrial powerhouses, which can choose to accept cryptocurrency transactions. It is also due to his social media influence and the exaggerated impact of opinion on cryptocurrency values.

First, look at the actions Musk’s taken that directly affect crypto. Tesla has bought $1.5 billion worth of bitcoin and it was also accepting payments for vehicles in bitcoin. It continues to hold the bitcoin hoard. But it’s ceasing to accept bitcoin due to the environmental impact of generating the crypto. In addition, SpaceX has contracted with Geometric Energy Co to fund a satellite going to the moon in another crypto, Dogecoin. Since he announced he was sending Dogecoin to the moon on April 1, nobody believed him until it was later confirmed!

Tesla and SpaceX are world leaders. Tesla is a Fortune 500 com­pany with a market value above $600 billion. SpaceX is the private sector leader in building rockets.

Automobile companies have long value chains. Tesla consumes primary metals; it also uses expensive composites, toughened windshield glass, leather, etc. The cars have sophisticated electronics ranging from sensors, specialised chips, cameras, dashboard instruments, and so on.

Tesla has even more hardware than most vehicles due to its on-board computer that can drive the car. It taps into the software industry to create the AI algorithms to drive. It also provides revenues for marketers, for advertising, and for the finance industry.

Like other electrical vehicle companies, Tesla is developing battery and charge technology and setting up charge stations. Plus, there’s the maintenance and services business. SpaceX’s value chain also straddles many sectors, from primary metals to high-end computer hardware and software.

When a Tesla or a Space-X deals in crypto, it creates a positive ripple effect. Suppliers and service providers inevitably end up dealing with crypto, too. Tesla moving away from accepting bitcoin will have a negative ripple effect.

Apart from actions, what has Musk said that caused crypto-volatility? He bumped up the price of Dogecoin, when he said good things, and called it a “People’s Currency”. Then he triggered a 35 per cent crash when he described Dogecoin as a “hustle”. His statement about Tesla eschewing bitcoin also triggered a big crash.

That brings us to the power of social media.

Musk’s Twitter account has over 55 million followers. Every tweet is parsed in excruciating detail. Anyone who criticises Musk also has hordes of fans trolling them.

He’s not particularly responsible, or measured on social media. In May 2018, he triggered a trollfest when he told an Australian scientist, Upulie Divisekera nanotechnology was 100 per cent synonymous with b**l s**t. His followers abused her for days.

In June 2018, he also called British diver and marine salvage expert Vernon Unsworth a “pedo guy” and doubled down on that offensive statement when they disagreed on the efficacy of using a midget submarine (donated by Musk) to rescue 12 boys trapped in a Thai cave. He later deleted the tweets and apologised. Musk has also faced investigation and paid a $20 million fine imposed by the US Securities Exchange Commi­ssion (America’s SEBI) after he falsely tweeted he had arranged funding to take Tesla private.

The combination of all those devoted followers and a hair-trigger Twitter profile has explosive ­eff­ects when it comes to cryptocurrency values. All financial assets are vulnerable to rumours affecting sentiment. Crypto currency is particularly vulnerable bec­ause it is anchored to nothing.

Fiat currencies are not anchored either. But traders and economists can look at indicators like external deficits, inflation, GDP growth rates, Fiscal Deficits, etc, to judge the value of a rupee or a dollar. Central banks can also fiddle with money supply and interest rates to influence fiat trends.

No such benchmarks exist for cryptocurrency. The money supply of popular cryptos grows at predictable rates as new coins are mined. Nobody “sets” interest rates. Indeed, cryptos discourage fractional-reserve banking operations and interest bearing instruments by design.

The value of a crypto, therefore, depends solely on the equation of supply and demand, and demand is driven solely by sentiment. Hence, Musk or anyone else with a big social media following can talk a crypto up or down. Musk has additional leverage. He can trade crypto in vast quantities, or influence its usage, by using his personal fortune, or via the large corporate entities he controls.

Does Musk do this solely for entertainment? Or is he manipulating crypto markets for gains? Note this isn’t illegal. It isn’t even a grey area. Crypto currencies are outside the purview of regulation in the same way wine is. So this might be an intriguing question but it’s hard to answer.

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