Experts answer: How does Elon Musk affect crypto space?

Recently, Tesla CEO Elon Musk has been all over the news. He became the richest man on the planet but later lost that title alongside about $6.2 billion of his fortune. Four of his SpaceX Starship rocket tests failed, but a later launching and landing were a success. This same type of roller coaster behavior — which might be a part of Musk’s nature — has also been witnessed within the cryptocurrency space.

In February, Tesla allocated $1.5 billion of its balance sheet to Bitcoin (BTC). Bitcoin’s price jumped by almost $3,000 in minutes and then surged 20% in 24 hours. A month later, Tesla decided to accept Bitcoin for payments on its electric vehicles before Musk changed his mind.

There was also the whole Dogecoin (DOGE) story: After Musk helped to pump up the meme cryptocurrency, a performance with his mother on Saturday Night Live helped to tank it. The self-proclaimed “Dogefather” later denied any official involvement in the DOGE project.

This article won’t focus on the legal concerns of Musk’s behavior, something already covered by law professor and former SEC attorney Marc Powers in his latest opinion article, where he raised important questions: 

“Does Musk have some undisclosed personal or business interest in knocking BTC and promoting DOGE? Are his tweets, which contain what some would consider wild speculation on the prices of Dogecoin and other cryptocurrencies, mere puffery and permitted First Amendment speech, or are they violations of securities, commodities, consumer or other laws?”

It will also leave aside all the price movements caused by Musk’s reckless tweeting and commenting to market analysts and experts. Instead, let’s focus on how all of this is affecting the crypto space in general.

Earlier this month, DOGE surpassed BTC in the global public interest. A survey later revealed that Americans are more familiar with the meme coin than they are with Etherum. This result might be upsetting to some, as the Ethereum ecosystem — which introduced smart contracts and became the fabric of the decentralized finance (DeFi) sector — surely deserves more recognition than a meme. 

But look at this situation from another perspective: People who were not previously familiar with cryptocurrency, blockchain technology and DeFi are starting to google Dogecoin. It might interest them and they might go deeper into the topic, resulting in a rise of awareness, which might lead to mainstream audience involvement in the crypto space. As Nick Spanos, the founder of Bitcoin Center NYC and the Zap Protocol, rightfully noticed: 

“DOGE is a powerful marketing tool, driving attention and adoption of crypto and decentralization as a concept. And in that respect, it is invaluable.”

The reason Tesla suspended its support for vehicle purchases using BTC was the company’s concerns regarding the “rapidly increasing use of fossil fuels for Bitcoin mining and transactions, especially coal.” Sounds reasonable for a company that develops electric cars, right? 

First of all, the question of whether BTC is a waste of energy isn’t new and has been debated by industry experts for some time already. Meanwhile, the mainstream media — The New York Times, Financial Times and Bloomberg, to name a few — went all out with headlines following Musk’s comments, blaming crypto for enormous energy use. They referred to Cambridge University’s Bitcoin Electricity Consumption Index, where the total electricity used worldwide by Bitcoin miners is currently at around 113 terawatt-hours per year. But what they failed to mention — intentionally or unintentionally — is that the latest study by the Cambridge Centre for Alternative Finance stated 39% of all energy consumption used in BTC mining was from renewable sources.

More interestingly, Galaxy Digital published a report entitled “On Bitcoin’s Energy Consumption: A Quantitative Approach to a Subjective Question,” where the company estimates the energy consumption of the traditional finance space to be around 260 terawatt-hours per year, more than twice as big as the Bitcoin industry. However, the estimations only came from available data, meaning it would be fair to say that the actual number is much higher. 

Another important note is that after the COVID-19 outbreak and the tremendous shift globally toward digitization, we must place the problem of crypto energy consumption within the broader context of internet usage. As Greenpeace USA media director Travis Nichols pointed out: 

“As web services grow and become more complex, the demand for computing power will continue to go up over the next few years, and that will require much more energy.” 

Also, Mark Cuban, billionaire investor and owner of the Dallas Mavericks, decided not to withdraw support for Bitcoin payment, arguing with Elon Musk:

“We know that replacing gold as a store of value will help the environment. [...] Shrinking big bank and coin usage will benefit society and the environment.”

If we go back to Musk’s accusations against Bitcoin, they did negatively affect the industry. For example, an environmentally-focused bill in the state of New York would place a three-year moratorium on crypto mining if it passes the state’s senate. But every cloud has a silver lining, as they say. What is good is that by bringing attention to the carbon footprints made by the crypto industry, the space can more quickly move toward sustainability, as happened with the global pandemic, which forced governments globally to work on green energy amidst COVID-19.

Cointelegraph reached out to crypto and blockchain industry experts for their opinions on the following question: How do all these Elon Musk comments affect the entire crypto space?

“Bitcoin has been through much worse. Long term, I don’t think it will have a major impact. Short term, I think it hurts investor confidence because it shows how much impact one person can have on short-term price movements. It’s a whole different debate, though, if Elon’s tweets were really the only thing driving the price movements.”

“In some ways, Elon Musk seems to enjoy creating controversies and capturing attention with statements about his bold business goals and achievements, which have earned him a sizable fan base, as well as SEC fines. Adoption of Bitcoin by corporate treasuries has caught the attention of many investors, especially after Tesla made $101 million in profit from the sale of its Bitcoin. It is no surprise that Elon would poke fun at Bitcoin as an investment after cashing out with a profit and focusing on Bitcoin descendent, Dogecoin, which had acted more as a temporary store of value and method for value transfers.

In 2018, Elon Musk and Tesla were reported to have reached an agreement with the SEC to each pay half of the $40 million in fines because of Elon’s careless, bold tweet about the future stock price of Tesla. This ‘misleading tweet’ caused a significant ESG impact because the Tesla stakeholders are the social component, or ‘S,’ of ESG. This action also affected the ‘G’ in ESG since this was a governance issue that required changes at the board level, and it caused a 14% plunge in the Tesla stock price. This was an ESG impact, specifically on the S and the G! It is hard to argue that Elon Musk’s behavior is guided by ESG principles. His playful statements about Bitcoin and Dogecoin may have impacted the market, but there were other factors that may also have affected market sentiment. Crypto value tends to decline as tax deadlines approach.

In addition, as more institutional money has been invested in crypto, there may be other traditional macro market drivers at play like inflation or the possibility of raising rates for the 10-year treasuries. The banning of Bitcoin or crypto in places like China and Turkey hasn’t prevented citizens from accessing the cryptocurrencies, although the restrictions may now have a greater impact as more institutions engage in crypto.

As headlines about Bitcoin and crypto ignite more interest, we will see a combination of emotional reactions to celebrity endorsements, together with behaviors that correlate with traditional market behaviors. Market perceptions of crypto are not totally based on what one celebrity says or does, but there is an emotional component to all markets. There are many different payment networks that currently accept Bitcoin payments, and Apple recently posted a new job for alternative payment partnerships.

The momentum for DeFi isn’t stopping as the crypto networks continue to grow. A temporary change in market conditions or price will not eliminate the effects of Maxwell’s laws on the crypto networks. There are many dimensions of crypto innovation that are flourishing.”

“I think there’s good news and bad here. On the good side, bringing cryptocurrencies and blockchain into a mainstream conversation is a positive development that gives all of us in the industry an opportunity to also talk about the real benefits of the technology. 

On the downside, more consumers will see Bitcoin or Dogecoin headlines and think cryptocurrency is only a highly volatile investment for speculators. So, we have to swim upstream a bit to explain the real and valuable uses of the Stellar network and other protocols and how they are tackling the world’s problems. I would rather the focus be on use cases, which is what we choose to talk about.”

“This crypto market shows how investor psychology can heavily impact crypto markets.

Traditional notions of rational, frictionless finance, which dominated financial thinking in the second half of the 20th century, assumed that everyone in an economy is fully rational. The notion of efficient markets assumes that all assets are correctly priced at their fundamental value, adequately reflecting all public information. Investors cannot ‘beat the market’ by identifying mispriced assets.

On the contrary, behavioral finance traces its origins to a 1981 paper by Robert Shiller from Yale University and Nobel Prize recipient, who found that market fluctuations can be too large to be consistent with fully rational thinking. This theory has gained wider acceptance since the 1990s. In the crypto markets, this has shown to be psychologically more realistic time and time again. Behavioral finance tries to make sense of markets in the context of irrational investor behavior and managerial actions.

Crypto markets, which represent a small fraction of the size of mainstream financial markets, still have plenty of room to mature and develop greater efficiencies. Irrational investors and decision-makers who drive prices based on emotion and exuberance may be creating opportunities for more rational investors to take advantage of arbitrage.”

“Elon has a flair for the dramatic, but there are definitely fair critiques and questions for the Bitcoin ecosystem to address. Hopefully, the increased attention from the broader public will catalyze faster adoption of renewable energy sources and transparency on how much these sources are used today.

When Tesla announced it would accept BTC for payments, I voiced my doubts that it would take hold because transactions on Bitcoin are too slow and the tax implications are significant. In taking this step, however, Tesla tested the waters on accepting crypto payments and can now explore networks optimized for near-instant finality, low fees and no environmental impact.”

“Even Larry Fink, CEO of BlackRock, the world’s largest money management firm, noted the ability to sway Bitcoin prices drastically with a small amount of capital. For Musk, who was briefly the world’s richest man earlier this year, this seems to be about more than just making money. He’s found a way to manipulate market sentiment in under 280 characters. We saw a bit of this from Trump as well, but Musk is clearly much better at playing this game.”

“We have, of course, seen many ups and downs in the crypto world, so we are somewhat immune to small, one-day news items like tweets from Elon or previous comments from Warren Buffett, Jamie Dimon, etc. In general, the negative comments have come from people who have a lot of fiat currency and don’t want the system to change. Elon is somewhat different in that he is a change agent. I certainly hope he is not doing this as a pump and dump with selfish motivations. I like thinking of him as a change agent and hero.

With regard to his energy statements: I almost always agree with Elon, but here he has gotten it wrong. Secondary effects of technology rarely are what they look like on the surface. Mining encourages the use of cheap alternative energy. We have actually found more energy on the Earth because of miners. Bitcoin uses far less energy than our existing system, which chops down trees for paper money and requires enormous infrastructure. How much energy do banks, buildings, mints, printers, etc., use up in the processing of fiat dollars?

Fiat currency is inflationary and encourages wasteful spending. Bitcoiners are holders.

And finally, with companies like OpenNode and the Lightning Network, we can have far more transactions per second than the Visa network, and for a fraction of the cost and almost zero cost of energy.

There are, of course, coins that are more environmental. Tezos uses proof-of-stake instead of proof-of-work and uses less energy, but all crypto is way better than the 200 plus fiats we have out there.”

“Musk’s tweets and the resulting effects certainly may have hurt crypto in the eyes of some institutional investors. While a good deal of investors already consider Musk a bit of a clown and aren’t making investment decisions based on his opinions, it raises concerns about the maturity of crypto markets that an errant tweet can erase hundreds of billions of dollars in market cap in just a few days. 

The whole Dogecoin affair, in general, is not helping crypto’s image either. Many thought that 2021 was the year that cryptocurrencies would begin gaining mainstream acceptance as an asset class, but seeing a meme dog coin hit an $80 billion market cap and then crash 50% is not ideal for crypto to be taken seriously. 

Institutional capital is still entering crypto rapidly, and that will continue this year, but the effects of these tweets undoubtedly led to some tough conversations in investment committees this month. For those of us in the crypto space, the best thing to do is not give so much attention and power to Musk or any other individual.”

These quotes have been edited and condensed.

The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph. This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.