Some people admire Elon Musk, believing him to be a brilliant entrepreneur. Other people resent the meteoric success that has made Musk one of the richest people in the world. My opinion is more nuanced. I think Musk's innovations in transportation and elsewhere are admirable. But I also think think the guy should just shut up about crypto until he understands it better.
When Elon Musk tweets it can move the price of cryptocurrencies. Far from being anecdotal, the impact of the tech mogul's tweets on the market have been reported on by major media and charted by Vox. From pumping Doge to flip-flopping on whether or not Tesla would accept Bitcoin, Musk has spent the year adding chaos to an already chaotic space. And it's not like he's an expert. His tweets suggest he's a total amateur.
Unfortunately, amateur or not, Elon Musk is extremely influential. Whether he knows it or not, the specter of his future tweets constitute a systemic risk to the crypto space. The market will eventually adapt to price such risk into its offerings. But by then much damage will already have been done.
Personally, I find it mildly amusing that Musk pumped Doge. And when Bitcoin dropped 15% on the announcement that Tesla wouldn't in fact be accepting Bitcoin like Musk had previously said they would, I thought it exposed a degree of price fragility that we would all be wise to account for. Assuming Musk didn't open any short positions before making this announcement, he can't really be faulted for the market's dramatic response to his words. But he can definitely be held responsible for sucking all of the air out of the room at a time when other, more important matters are transpiring.
Changing Regulatory Landscape
While many in the crypto world are focused on celebrity tweets, the landscape of the space is changing in significant ways. Regulators are making moves. In the US, the Treasury Department just announced a plan to try and raise an additional $700 billion in tax revenue by implementing new tax compliance measures.
These new compliance measures follow years of declining audit rates and lax tax enforcement. According to the Washington Post, "Audit rates for corporations with more than $20 billion in assets fell from 98 percent in 2010 to 50 percent in 2018 ... Taxpayers earning more than $10 million faced audit rates of 19 percent in 2010 but just 7 percent in 2018. Audit rates declined for taxpayers broadly, but the decline in audits for the rich was particularly pronounced."
An important component of the Treasury Department's push to increase taxpayer compliance involves cryptocurrency. Specifically, crypto will be subjected to enhanced reporting requirements. Any company that receives more than $10,000 in crypto will be required to report it to the IRS. Treasury's plan also says that, "Cryptocurrency already poses a significant detection problem by facilitating illegal activity broadly including tax evasion." Language like that is highly problematic for the price of Bitcoin.
Small vs Big Investors
Small investors might be moved by a Musk tweet to buy or sell Bitcoin. But major players are probably focused more on the emerging regulatory climate than on what some non-expert celebrity has to say. In this moment, the Musk effect and impending regulator action seem to have aligned to scare money out of crypto. Continued innovation will bring this money back into the market eventually. When it does, I hope Elon Musk can just shut up about it.
Nothing I say should be taken as financial or investment advice.