For about a year, Tesla founder Elon Musk has often been accused of influencing the prices of certain cryptocurrencies like Bitcoin and Dogecoin through his social media activities. An in-depth study of the “musk effect” and its implications for cryptocurrency markets.
In the study “How Elon Musk’s Twitter Activity Moves Cryptocurrency MarketsOn the one hand, it is about determining the “Musk effect” on the cryptocurrency markets, and on the other hand, determining how strong its influence is in the market. To this end, an event study approach was used to analyze how Elon Musk’s Twitter activities could affect cryptocurrency returns and volumes in the short term. In the first step, a sample of 47 cryptocurrency-related tweets representing so-called “events” was extracted from Elon Musk’s Twitter timeline.
Depending on the methodology used, the extent to which revenues and trading volumes for said cryptocurrencies changed when information became known or an event occurred was considered below. For this purpose, market information about the event was compared with historical data. The aberrations that were identified were classified as ‘abnormal’ because they could only be explained by the event and then tested for statistical significance.
The first “musk effect”
On January 29, 2021, the price of Bitcoin rose from around $32,000 to $38,000 within a few hours. This increase in value corresponds to an increase in the market capitalization of Bitcoin by about $111 billion. Not long ago, Elon Musk, the founder of companies like Tesla or SpaceX and at that time the richest person in the world, modified his Twitter profile.
The adjustments were made as follows: on the one hand, Elon Musk only used the term “#bitcoin” in describing his Twitter account, and on the other hand, he tweeted “later, it was inevitable,” which supports the decentralized cryptocurrency he suggested. Bitcoin Elon Musk. However, aspects that were not known to the general public at the time was that Tesla before dedicating Elon Musk’s Twitter profile was not just He made a large investment in bitcoinbut also aims to accept Bitcoin as a method of payment.
Crypto is back flanked by a tweet from Elon Musk
The figure below shows the cumulative return (log converted) from 360 minutes before Elon Musk’s crypto tweet to 120 minutes. The “all” group includes bitcoin, ether, and Dogecoin, while the other two groups simply represent notes of Dogecoin or Bitcoin. Ethereum (N = 1) has been deleted. All 47 events saw prices rise by about 3% after the tweet was posted. For the ensuing hour, prices continued to rise before finally falling again.
A more differentiated view of events related to Dogecoin and Bitcoin provided more insights into the interaction of the described effects. Bitcoin tweets tended to come out the most when bitcoin prices were falling (about -2% in the six hours leading up to the tweet), while tweets about Dogecoin came after a six-hour rally of about 2% on average. These findings may indicate that Musk’s Dogecoin tweets were in response to a rise in the value of the cryptocurrency, while tweets about Bitcoin may have been more in response to a price drop.
The trading volume associated with the cryptocurrency tweet
In addition to looking at the yield, trading volume also played an important role. The figure below shows the volume (logarithmic) of a cryptocurrency-related tweet from Elon Musk. Trading volumes were relatively stable before the tweet was published, but increased significantly at the time of publication.
As with returns, the relative impact of Dogecoin has been much greater than that of Bitcoin. Bitcoin trading volume decreased slightly compared to Dogecoin in the two hours following the tweet, with total volume well above pre-tweet levels. The interesting thing about the events is that the sudden spike in response to the tweet in both returns and trading volume only lasted for two to three minutes.
Event study results
As part of the event study, we identified high-significant positive effects in the event minute and in the next two minutes. The event minute impact was 1.46%, with 83% of events showing positive returns. In the first minute the effect was 1.50% and in the second minute it was 0.62%. Thereafter, the abnormal returns were generally lower and no longer significant.
As a result, it can be seen that the market has finally returned to its “normal state” with the same speed and clarity as it reacted to Elon Musk’s tweets. This can also be inferred from the cumulative abnormal returns, which were overwhelmingly positive for all periods considered and varied only slightly in absolute terms (3.5 to 4.8% in all periods after 2 days). 91% of events resulted in an abnormally positive return within the five-minute period.
There have also been major impacts with Dogecoin. For example, the moment Elon Musk tweeted about Dogecoin, the market responded with an abnormal 2.2% return, followed by another 2.2% the next minute. After the third minute (0.8%), the effects were no longer significant. However, for the 14 Bitcoin events, no significant impacts could be identified. Although the proportion of positive results exceeded 50% in all cases (except one) and the overall results were consistently positive, none reached statistical significance. This stark difference between Dogecoin and Bitcoin may be due to the fact that Elon Musk’s tweets about Dogecoin were quite positive in nature, while his tweets about Bitcoin contained both positive and negative aspects where the effect may have been offset.
Cumulative returns on negative, positive, and neutral bitcoin tweets
In light of the above results, an additional analysis of the Bitcoin tweets was carried out. Tweets of the 14 Bitcoins related to neutral, positive or negative opinions or facts. Because some of them contained non-textual elements, it was not possible to classify tweets objectively using methods such as sentiment scoring. As a result, a self-assessment of cryptocurrency experts was used, according to which four negative tweets and ten non-negative tweets (positive or neutral) of the 14 bitcoins were rated.
The figure below shows the cumulative returns from 360 minutes before a Bitcoin-related tweet to 120 minutes ago. It is clear that non-negative tweets lead to positive bitcoin returns, while negative events seemed to trigger a negative reaction in the market.
For the 10 non-negative events, we found that, with the exception of the two-minute period after the event, all periods considered were associated with significantly positive abnormal returns. So it was about 1% in the first 5 and 10 minutes and it got to 3.7% after 2 hours. However, it is important to note that the effects varied greatly depending on the content of the tweets. In particular, adapting Musk’s Twitter profile to #bitcoin (13.6% after 1 hour and 14.3% after 2 hours) and the statement about Tesla “owning diamond hands” (9.3% and 16.9%) had significant impacts. On the other hand, the relatively larger negative impact was found as a result of the tweet saying that Tesla would suspend Bitcoin as a payment method for car purchases. The latter is associated with a significant abnormal negative return of -11.9% within the two-hour period after the tweet.
According to the scientific concept of coherence introduced by Anderson and Baum (1994), the results of our study indicate that Elon Musk’s Twitter followers, when evaluating new information – in our case about Bitcoin, Ether or Dogecoin – differ from the data or information on Elon Musk’s Twitter profile Due to his existing reputation as a successful and innovative businessman, this has a similar effect on their behaviour.
This effect can be explained using the so-called cognitive balance theory. It is designed to explain how people resolve inconsistencies in their personal influences. If applied to the results of our study, it means that Elon Musk’s Twitter followers are trying to balance his statements with their image of Elon Musk as a person. According to the theory, a positive evaluation of Elon Musk as a person will lead to a similar perception of the tweet by the respective follower and their attitude will be conveyed accordingly to the cryptocurrency “product”.
Further interpretations of the results
In contrast, signal theory deals with the interpretation of signals and the conclusions drawn from them. Following this theory, Elon Musk’s tweets are seen as quality market signals that are priced right in. Elon Musk does not incur any costs in the traditional sense, but in some way jeopardizes his reputation and risks counter signals, for example in the form of contributions from other influencers. It can be assumed that the market will only react as long as the signal (i.e. the tweet) provides value. If the market loses confidence in the signal quality, the information is discarded accordingly.
If you follow this perspective, it can be argued that the “holding effect” is a non-monetary aspect of the efficiency of financial markets. However, the fact that the richest person in the world could increase the price of Bitcoin by 16.9% or decrease it by -11.8% with a simple tweet raises some complex ethical questions. As a result, our study was able to demonstrate that the social media activities of influencers can have a significant (temporary) impact on cryptocurrencies and the results reveal a conflict between the ideals of freedom of expression, ethics, and investor protection.