An Elon Musk Tweet Can Move Markets
Can an Elon Musk tweet really impact the value of cryptocurrency? Short answer, yes.
In financial markets, valuations are usually primarily driven by fundamentals such as company-specific DCF, FCF, and multiples analyses. That said, in the short term, markets are often irrational, deviating from fundamentals, and can stay that way for longer than investors can remain solvent, yet they always correct themselves. In contrast, what moves prices in the crypto market? Is it the greater fool's theory or the information content effect of news?
It is a decentralised industry fuelled by a desire to remove the middleman. To democratise payments and credit while removing the ability of one party to influence the market. However, it seems like sway is still driving valuations.
It is well documented that social media and celebrity endorsements have been potent tools to move crypto prices. Of these, there is one with a particularly strong grip over the market, Elon Musk.
The Elon Effect
To put Elon’s influence on the crypto market into perspective, when he expressed his interest in Dogecoin in February last year, he single-handedly pushed up market prices by approximately 50%. Subsequently, when he announced Tesla would start accepting Dogecoin for a limited category of merch, the currency further appreciated by an estimated 43%.
If this wasn't enough proof, the entrepreneur has also profited from his tweets and crypto trading. He mocked Bitcoin for years, comparing it to fiat currencies. Yet, last year Tesla announced a $1.5 billion investment into the currency, which sent its valuation soaring by 20%. Tesla later announced it would accept BTC payments, sold off part of its Bitcoin holdings, and then canceled accepting BTC payments, which depressed the price by an approximate 12% on the day.
Is it Market Manipulation?
Under UK regulations, market manipulation is illegal and can be approached by civil and criminal regimes. Both routes would refer to statements and actions attempting to manipulate market sentiment and, thus, influence prices. Some experts in securities law argue that Elon's disruptive behavior towards crypto exchanges could be perceived as market manipulation. Many others are not convinced. Regardless, he has been warned off tweeting on subjects that could sway markets and was fined $20 million by the SEC. Yet, it doesn't seem like his influence has faded one bit in the eyes of investors.
Implications for the Entire Crypto Market
Individuals like Elon Musk having so much influence in the crypto community has been a concern for the SEC and regulators in the US for years. However, it was when traditional investors started losing their savings over these indicators that introducing more stringent regulations became a hot topic. Hester M. Peirce, a pro-crypto commissioner with the SEC, has proposed an alternative solution – providing more clarity governing the crypto market to avoid losing talent and innovators to countries with laxer policies over crypto.
As regulators try to introduce further protections for crypto holders, it will be interesting to observe what other factors prove to drive valuations in the market.
Author: Andrei Rata
Andrei has an extensive quantitative academic background in Finance from Bayes Business School in the City of London as well as several years of professional experience in copywriting and communications. He holds a particular interest in disruptive finance and financial technologies as means of challenging long-lasting lines of thought.