Faculty of law blogs / UNIVERSITY OF OXFORD

The ‘Musk Effect’ in cryptocurrency markets


Lennart Ante
Doctoral Student at the University of Hamburg and Co-founder of the Blockchain Research Lab


Time to read

3 Minutes

In January 2021, the price of Bitcoin rose from about $32,000 to $38,000 within a few hours, which corresponded to a $111 billion increase in market capitalization. This increase followed the following event:  Elon Musk, founder of companies such as Tesla or SpaceX, adjusted his Twitter profile bio by exclusively using the word ‘#bitcoin’ for his account description. At that time, it was still unknown to the public that the automaker Tesla had made a substantial investment in Bitcoin.

My article ‘How Elon Musk’s Twitter activity moves cryptocurrency markets’ aims to examine to what extent the above mentioned and other Twitter activities by Elon Musk have actually influenced the cryptocurrency market. Hence, in addition to the above-mentioned event, five other recent tweets in which Elon Musk commented on cryptocurrencies are evaluated in the article.

To calculate the exact effect of the tweets, event study methodology is used. To put it simple: a historical average return of assets is calculated, which is compared with the actual return around an unforeseen event. The difference between the two metrics represents the so-called abnormal return. According to the model assumptions, the abnormal return can be fully attributed to the unforeseen event, ie in this case it explains the ‘Musk Effect’.

Price and trading volume data were collected for the cryptocurrencies Bitcoin and Dogecoin and the respective effect of each event was quantified. Significant abnormal returns were identified for four of the six events. Significant positive abnormal trading volume were identified for all six. Especially, the twitter bio adjustment to ‘#bitcoin’ and the tweet ‘One word: Doge’ led to large abnormal effects. In the ‘#bitcoin’-case, the significant abnormal return of Bitcoin amounted to 6.31% over a time window of 30 minutes from the moment Musk changed his bio. This abnormal return 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 influential people can have on cryptocurrency markets. 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. Consequently, the cryptocurrency market—efficiently—reflects this newly available information. Therefore, an effect does only occur if the information is relevant.

As the trading of the cryptocurrencies Bitcoin and Dogecoin always requires a buyer and a seller, there must be one person or entity that paid the highest price observed on the market. Since these two cryptocurrencies do not contain any form of dividends or alike, a future return does solely depend on the market price. If we assume that 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.

Such considerations naturally lead to complex questions of, eg, moral or ethics. On the one hand, everybody should have the right to make use of his freedom of speech but on the other hand, uninformed/retail investors need to be protected. Elon Musk’s tweets about Dogecoin were presumably meant exclusively as a joke, which was confirmed by Musk himself. 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, since Tesla has acquired large amounts of Bitcoin, it is not surprising that people might have raised the question to what extent such a calculated behavior existed. 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 the Tweets of Elon Musk were referring to cryptocurrencies, it should be kept in mind that this phenomenon is not only relevant for cryptocurrencies but also for even more heavily regulated securities sectors.

The above-mentioned considerations do inevitably lead to questions such as if communications by public figures on topics that potentially impact financial markets should 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 a Doctoral Student at the University of Hamburg and Co-founder of the Blockchain Research Lab.


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