On January 29, 2021, the price of one Bitcoin rose from $32,000 to $38,000 within a few hours. The catalyst for this jump appeared to be an update to Elon Musk’s Twitter bio. Musk used #bitcoin for his account description followed by a tweet that said: “In retrospect, it was inevitable.” At the time, the world was unaware that Tesla, Inc. had made a substantial investment in Bitcoin, nor that the automaker intended to accept Bitcoin as a form of payment.
My recent article “How Elon Musk’s Twitter activity moves cryptocurrency markets” examines the extent to which the Twitter activities of Elon Musk have actually influenced the cryptocurrency market. In addition to the above, five other tweets from 2020 to 2021 were selected in which Elon Musk commented on cryptocurrencies. These included:
- the publication of a photo with reference to the cryptocurrency Dogecoin;
- a tweet that included the Dogecoin symbol;
- a tweet about Dogecoin: “One word: Doge”;
- the tweet “Bitcoin is my safe word” as well as the tweet “Bitcoin is almost as bs as fiat money” and finally;
- a tweet showing a photo of how a “Dogecoin standard” is overrunning the global financial system.
To calculate the exact effect of the tweets, I used event study methodology. Under this method, a historical average return of assets is calculated, which represents the expected return. This expected return is compared with the actual return around an unforeseen event. The difference between the two metrics is known as the so-called abnormal return. According to the model assumptions, the abnormal return can be fully attributed to the unforeseen event.
The corresponding price and trading volume data were collected for the cryptocurrencies Bitcoin and Dogecoin and the respective effect of each event was quantified using the above-mentioned method. Significant abnormal returns were identified for four of the six events. Significant positive abnormal trading volume were identified for all six. The change of Musk’s twitter bio to #bitcoin and the tweet “One word: Doge” stand out. In the first case, the significant abnormal return of Bitcoin amounted to 6.31% over a time window of 30 minutes from the event. It grew to 18.99% over a period of four hours. Regarding the Dogecoin tweet, the abnormal return was 8.16% after only five minutes and peaked after sixty minutes (17.31%).
These two results show the significant influence that people such as Elon Musk can have on cryptocurrency markets—similar effects were identified for stock markets in the context of Donald Trump’s tweets. To what extent Elon Musk’s tweets were intended to result in a specific outcome cannot be answered.
One possible view of this “Musk Effect” is that it represents an uncritical aspect of the efficiency of financial markets. The weak form of the market efficiency hypothesis states that markets reflect all available information. Therefore, an effect does only occur if the information is relevant. In the end, it is solely a theoretical interpretation that ignores further implications and consequences.
The trading of cryptocurrencies such as Bitcoin and Dogecoin always requires a buyer and a seller. Hence, there must always be one person or entity that paid the highest price ever. These two cryptocurrencies do not pay dividends, meaning that a future return solely depends on the market price. Referring to our case study, the following assumptions can be made. If a well-known person influences retail investors to buy a cryptocurrency, this may increase the probability that these retail investors end up as the very investors who paid the highest price. This may be explained by a cascade effect or—using a popular term in the cryptocurrency market—FOMO (“fear of missing out”). Broadly speaking, one may think of fraudulent pump and dump schemes, which are intending to pump up the price of assets quickly before dumping it on stragglers. I am not claiming Musk engaged in a pump and dump scheme; the explanation simply demonstrates an extremely negative example.
Such considerations naturally lead to complex moral questions. On the one hand, everybody should have the right to make use of his freedom of speech, but on the other hand, uninformed investors need to be protected. An objective assessment of such questions is difficult and may heavily depend on the underlying motives. Elon Musk’s tweets about Dogecoin were presumably meant exclusively as a joke, which was confirmed by Musk himself in a conversation on the social media platform Clubhouse. But if even a casual mention of Dogecoin leads to high abnormal returns, what impact could a precisely planned campaign potentially have? Given that such a mention or campaign could also have a negative sentiment, it is important to point out that these actions could also result in significant losses.
Particularly in view of the fact that Tesla, Inc. has acquired large amounts of Bitcoin, it is not surprising that people might have raised the question of how calculated was Musk’s behavior. Of course, these kinds of actions could theoretically have a significant impact on our future society and economy: If the richest person in the world can increase the price of Bitcoin by close to 19% with a simple message on a social network, imagine how this could result in a continuum where influential, rich people use their outreach to increase their own wealth. This in turn raises the question of whether there is anything wrong with this form of public mention or support. Even though Elon Musk’s tweets were referring to cryptocurrencies, it should be noted that this phenomenon can be applied to more heavily regulated securities.
The above-mentioned considerations raise several questions that only policymakers can settle: Should communications by public figures on topics that potentially impact financial markets be monitored or regulated? How is a “public figure” defined and by whom? And should such individuals or entities be required to disclose any investments or holdings?
Lennart Ante is co-founder of the non-profit research institute Blockchain Research Lab.