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Elon Musk’s Influence on the Cryptocurrency Space

Last week, when Tesla and SpaceX billionaire Elon Musk tweeted that he had spoken with Dogecoin developers about making it more efficient, there was a predictable impact. It sent the price Doge to the moon. However, it is only the laster in a series of Musk tweets that has sent the viral crypto coin on a roller coaster over the last few weeks.

And still, it caught Dogecoin’s core development team by surprise, according to Michi Lumin, a Colorado-based developer who helps with the crypto coin maintenance. Musk has been ‘spitballing ideas’ with the team for some time, says Lumin, including making it more efficient.

While the team welcomed his input, the intense spotlight from his string of Doge-boosting and Bitcoin-bashing tweets has been pretty stressful. Lumin says that it has also invited scorn from critics who see Dogecoin as a joke and sending the market into upheavals. While the coin may be based hugely on hype, the team had planned to remain discreet (1).

‘We are not Eloncoin,’ says Lumin. Except, it seems, for whenever Elon Musk decides to tweet.

Musk’s Influence

Notably, Elon Musk’s influence is not limited to Dogecoin. Last week, Musk also tweeted that because of climate concerns, Tesla would stop accepting Bitcoin in exchange for cars three months after saying it would.

While it is true that Bitcoin does use enough energy to power a mid-size nation, a sizable, though vigorously argued, portion comes from fossil fuels such as coal, the big mystery is why it was not an issue for Musk only a few months back.

There are high chances for it to be a green marketing move or some type of regulatory preempt. Or maybe it was a troll meant to make us all contemplate the worth of things for the sake of tautology.

Whatever might be the rationale, Elon Musk is building and destroying small fortunes, 280-characters at a time. According to Jill Carlson, Slow Ventures’ block-chain-focused investor, it is very scary and irrational.

When Musk first announced that Tesla would accept Bitcoin for cars and it will purchase 1.5 billion USD worth of it, the value went spiking. However, when he backed out last week, the news erased 300 billion USD from the market within minutes. His following indictments over the weekend, including a Sunday’s tweet (2) suggesting that Tesla may have already offloaded its Bitcoin holding, sent the price even lower. (Notably, Musk later clarified that the company has not sold. (3))

Let’s see from where it all started;

  • On January 29,20021, Musk added the hashtag #Bitcoin on his Twitter bio, leading to Bitcoin skyrocketing from 32k USD to 38k USD.
  • Two days later, he described Bitcoin as a good thing in a Clubhouse chat.
  • In February, Tesla disclosed its Bitcoin purchase worth over 1.5 billion USD in an SEC filing. It also announced its acceptance of the token as payment.
  • During this time, Musk started focusing more on Dogecoin and not Bitcoin.
  • While Bitcoin rose to a high power of over 63k USD in the following months, it sank below 40k USD when Musk tweeted about Tesla stopping to accept Bitcoin over climate concerns, and the value has been dropping ever since.

Meanwhile, Musk’s period tweets mentioning Doge, usually heavier on jokes than substance, sent the market into exuberation. It tanked when he went on a popular American show Saturday Night Live and called Dogecoin a ‘hustle.’ Until he single-handedly carried it back with the greenification tweet.

“It is not comfortable to have any single person or small company with an ability to manipulate the market,” says Lumin.

He adds that “it is where we are in crypto now, and it is not good for sure.”

It could be five-dimensional chess or whimsy as Dogecoin is a slightly uncanny choice to champion as an eco-friendly option because it runs on a similar energy-intensive system as Bitcoin’s. And there are plenty of crypto alternatives that use cleaner processes, none of which merit a mention on Musk’s Twitter feed.

Last weekend, Musk suggested that he would create a cryptocurrency from scratch if his Dogecoin plan did not work out (4). “Musk seems to be motivated by his own entertainment on the Dogecoin,” says Carlson. “Musk goes wading into these problems and then sets them up so he can enter as the hero.”

Musk also seems to have imperfect control over his influence. Crypto investors had time to plan for his SNL appearance. For instance, they had spiked up the price in anticipation and quickly started selling when mentioned on air. A classic investment trope; buying the rumor and selling the news.

However, his tweets drop without any warning. A finance professor at Villanova University, John Sedunov, highlights that Musk knew that there would be a negative light on his Tesla announcement.

It is not only a crypto thing, says Carlson. With the surge of app-based platforms that allow people to buy and sell stock at a moment’s notice, retail investors increasingly look at certain influential individuals for signals on purchasing and selling.

Musk is needed to tweet true things for Tesla’s stock and doesn’t offer confidential information. He has settled with the Securities and Exchange Commission after violating these rules in 2018. However, there are fewer restrictions with public companies he doesn’t run or own (5).

His January tweet affirming his love for Etsy (6) sent the stock up 9%. Could he single-handedly tank the same tock in 280 characters? That is unclear. However, he is up there with a small number of individuals who have such power. And he certainly wields it more loosely than the others in that echelon.

And Tesla still sitting on a pile of Bitcoin complicates the matter further. According to Carlson, there is a question about whether it is ethical and legal for someone we know to be taking positions in the market to be speaking and tweeting publicly to move markets. However, it is tricky.

Apart from explicit fraud, it is hard to keep market-moving tweets in check. “One can’t be police based on what one thinks is someone’s subjective heart-of-hearts intent,” says a lawyer at Kobre and Kim, with specialization in crypto, Benjamin Sauter.

And another thing is, Doge and Bitcoin are not stocks. Legally, they are commodities like gold, sometimes used as currencies like dollars. Both have fewer rules regulating how people talk about them.

Sedunov describes that ‘Tesla has dollars too. A CEO won’t get in trouble for saying Jay Powell should change its interest rates because our dollar could be stronger or weaker.

In theory, those markets are also harder to swing. Unless such a hypothetical tweet came from Powell, it probably wouldn’t have any impact.

Another reason why cryptocurrencies are treated differently is that they are ‘sufficiently decentralized.’ They are not beholden to a particular private company or group in the way like stocks. However, in practice, decentralized networks have their centralization forms.

So-called whales with vast holdings have long dominated the crypto market with their ability to move markets when they sell or buy.

Since now, a growing number of institutional investors like Tesla joining in, which means there is a whole new set of influencers like Elon Musk, who can move the market with a tweet such as the one on Sunday that said Bitcoin is too centralized (7).

“It tells one about where we stand on the question of whether it is suitable as a value store,” says Sedunov. “The answer is maybe not. The jury is out on whether and when we get there.”

Crypto markets are in their gangly awkward teenage phase, where they are often easily influenced and bullied.

Dismantling of Bitcoin

Now that we have discussed Musk’s influence on Bitcoin let’s see how he seems to be on a mission to bring it down. At present, he seems to be long on Doge and short on Bitcoin. Why the change of heart?

One possible answer could be his thinking influenced by Tesla’s Board of Directors. However, why didn’t they object when the company purchased 1.5 billion USD worth of Bitcoin earlier this year.

Maybe Occam’s Razor can give us an answer. Elon Musk realized that Bitcoin consumes a massive amount of energy, much of it from coal. Simultaneously, Bitcoin’s blockchain is pretty inefficient, rendering the cryptocurrency all but useless as a functional currency. Consequently, it is a token that is both bad for the environment and virtually useless in any practical applications.

On the other hand, other tokens are more efficient in transaction processing and energy consumption, which explains his reversal on Bitcoin.

However, it still doesn’t answer why he only now came to these realizations that have been pretty obvious for some time. It also doesn’t answer whether his next tweet will again reverse his stance on Bitcoin.

Is Musk Relentless?

There is no wonder that the bitcoin community has come to feel, in the words of an analyst at Global Data, Danyaal Rashid (8), that Elon Musk ‘has too much influence?’

There are fears that his relentless whipsawing of prices is bad for Bitcoin’s reputation and other crypto assets. According to Rashid, “People may lose confidence in cryptocurrencies as one tweet from Musk can change the price, defeating any idea that there are any real fundamentals at play.”

A Bloomberg report by Matt Levine (9) described that Musk’s will he or won’t he tweets and his Bitcoin-related corporate policies don’t have any economic rationale. “He is messing with us.”

Suppose Musk had been truly concerned about Bitcoin’s environmental footprint. In that case, he is rather late to the party, especially if he is implying that he has just learned about it since the issue has been known about and discussed widely for over a few years now.

The Environmental Concerns Over Bitcoin

Let’s take a look at the environmental issue and if there is anything Musk can do about it.

Theoretically, Bitcoins are produced via the solving of an increasingly abstruse computer riddle, needing ever-increasing power to solve. The process is called mining. Successful miners get a supply for bitcoins, which will top out permanently at 21 million. Notably, over 18.7 million have already been ‘mined,’ hence there has been an intense frenzy over mining the fast few (10).

As we have previously discussed, the energy needed to run the mining computers are often compared to consumption by entire nations. Over the past year, we have seen Argentina, New Zealand, Austria, the Philippines, and Ukraine invoking.

However, it is not merely the consumption level but also the source of energy that worries environmentalists.

Source: The US Energy Information Administration
Source: The US Energy Information Administration

According to estimates, over 65% of all bitcoin mining occurs in China, where the electric grid is highly polluting since 86% of its energy comes from nonrenewable sources (11), including coal (58%, the worst polluting source), oil (20%,) and natural gas (8%).

As per the Sierra Club (12), Co2 produced from Bitcoin mining could increase planet temperature by 2 degrees C over three decades. It would severely affect our environment, causing widespread extinction, forest destruction, and the collapse of the ocean ecosystem (13).

When Musk announced Tesla’s reversal on the decision to accept Bitcoin as payment for its vehicles, he added that the company would resume ‘as soon as mining transitions to more sustainable energy.’ That is a long way off.

Musk said that they are also looking at other cryptocurrencies that use less than 1% of Bitcoin’s energy/transaction.

It could be a reasonable goal since Bitcoin’s over 7070 kilowatt-hours per transaction energy consumption (14) is more than 10x that of the runner-up, Etherum, at 62.66 kilowatt-hours. Others, including XRP, Cardano, and Dogecoin, use even less.

Source: TGR Datacenters
Source: TGR Datacenters

We can assume that Musk’s tweet could be a subtle promotion of Dogecoin, a cryptocurrency launched as a parody of Bitcoin, which has taken a life of its own, in part because of Musk’s talks.

Musk’s Mysterious Interest in Cryptocurrencies

Weaning the crypto market is a tall order. Bitcoin is still the king of the hill among the ever-proliferating cryptocurrencies universe. Even as its value is dropping, Bitcoin’s market capitalization is still at about 767 billion USD handily outstrips that of Etherum, at 314 Billion USD. Cardano, 54.3 Billion USD, XRP, 52.3 Billion USD, and Dogecoin, 50.75 Billion USD, are runner-up, and a host of even more obscure digital currencies like Stellar, Chainlink, and TRON are even further behind (15).

And, of course, all those values are largely speculative as cryptocurrencies don’t even theoretically represent value assets, unlike government-backed currencies. They are worth only what a bidder is willing to pay for them with no price floor.

It is true that anyone with Bitcoin, among other crypto assets over time, has reaped a windfall since its price surged about 343% last year when trading at 9,724 USD. However, holding onto Bitcoin stake also need intestinal fortitude since last year also witnessed some nauseating plunges. Bitcoin had lost one-third of its value at its current price since it was traded at 63,347 USD a month before.

The nature of Elon Musk’s interest in Bitcoin, Dogecoin, or other crypto assets is mysterious. Even when Tesla started accepting Bitcoin in payment, the company did not make the transaction particularly easy (16).

Customers needed to make their payments within 30 minutes of making a deal, or the Bitcoin price would expire, and they would have to start again. Tesla had also warned that if one made a mistake, like entering the wrong recipient code and Tesla never received the money, then it’s their problem (17).

It is because Bitcoin transactions are irrevocable. It is unclear how many Tesla buyers have paid in Bitcoin; while some people have claimed on Twitter to have done so, the company has not verified those reports.

There is also no sense for Tesla’s 1.5 billion USD Bitcoin hoard in terms of its profit and loss statement. While disclosing the investment in February, Tesla stated that Bitcoin would be in its books as ‘indefinite-lived intangible assets.’

As per the accounting rules, Tesla needs to evaluate those assets quarterly and report a loss any time Bitcoin’s value falls below its purchase price. However, Tesla cannot recognize a profit, even if it surges until and unless it sells its Bitcoin.

It unbalances Bitcoin accounting towards a loss. If Bitcoin surges, Tesla could sell its holding and recognize the gain. However, how much Bitcoin fell on speculation that Musk had sold, his tweets on Bitcoin places him in a potential conflict of interest since he can effectively manipulate its prices with his words, negative or positive.

When Tesla announced its plan to purchase Bitcoin, it was an investment risk as much for investors as it was for Tesla, as several reports pointed out that “Bitcoin fans should pray that Elon Musk does not cook on the crypto” (18). Now, we see that phenomenon in action.

So What is Elon Musk’s End Game?

His goal could be to undermine interest in Bitcoin by highlighting its environmental impact. Perhaps his contradictory tweets over the past few days aim to prop up the price long enough for Tesla to dump its stake.

Or perhaps, as Levine suggested, he is messing with our heads in that way he has. Whatever the case, he has proved that smart investors should steer clear of Bitcoin and other crypto-assets.

Wrapping Up

So what does it mean for Bitcoin’s future?

It could be everything and nothing. Elon Musk has certainly shined a light on Bitcoin’s shortcoming. In a way, he has done us all a good service, and history won’t be kind to Bitcoin.

However, in the long-term, he may have little influence over it. But if the current market has taught us anything, it is that news ages fast. Remember Gamestop?