Tuesday, 18 May 2021

 

Elon Musk’s tweets highlight the problems with crypto markets

When one man can move a near-trillion dollar market by as much as 20 per cent with a tweet, it ought to be a wake-up call for investors and regulators.

Elon Musk has now shown, quite consistently, that he can cause the price of bitcoins – and other cryptocurrencies – to soar or tumble in response to his somewhat erratic but plentiful contributions on Twitter.

Tesla chief Elon Musk has been moving cryptocurrency markets with his tweets.

Tesla chief Elon Musk has been moving cryptocurrency markets with his tweets.CREDIT:AP

Bitcoin’s price crashed more than 15 per cent within 24 hours last week after Musk tweeted that Tesla would no longer accept payment in bitcoin because of its environmental impacts. (Mining bitcoin consumes more energy than Norway).

Then, on Monday, bitcoin’s price dived again, below $US43,000 ($55,210), when Musk seemed to imply (in a tweet, of course,) that Tesla had sold its bitcoin holdings. Tesla revealed earlier this year that it had bought $US1.5 billion worth of bitcoin and subsequently that it had sold $US272 million in the March quarter.

When Musk clarified his comment, saying Tesla hadn’t sold down any more of its stake, the price bounced back up to $US44,863. More recently it was trading around $US43,400, a far cry from the record levels it reached last month, when it traded just below $US65,000.

It’s not only bitcoin’s price that Musk can move. In his “famous” appearance on Saturday Night Live earlier this month Musk described Dogecoin (created as a joke) as a “hustle.” The price immediately plunged by more than a third.

After Musk tweeted last Friday that he was “working with Doge devs (developers) to improve transaction efficiency” the price leapt 30 per cent on Monday.

What Musk demonstrated was a very clear ability to move a very large market – the market for crypto assets is worth more than $US2 trillion – with a handful of words.

It isn’t clear whether he intended to do that – he tends to shoot from the lip and his utterances aren’t always consistent – but it is very apparent that he could.

That says something disconcerting about cryptocurrencies and the markets in which they are traded.

The size of the market for bitcoin ought to mean that it has depth and liquidity. Its volatility, however, signals that it doesn’t.

The scale of investor activity, particularly the activity of retail investors drawn to crypto assets by the potential to win big, ought to have attracted some investor protections from regulators, but hasn’t.

The volatility is consistent with the view that bitcoin and the other cryptocurrencies are purely mediums for speculation. They aren’t effective mediums of exchange, produce no cash flows and provide no interest in an underlying physical asset. They have no fundamental value.

For retail investors, the market is akin to a lottery where they either win big or lose heavily with no ability to assess the likelihood of the outcome.

There are nearly 10,000 different crypto coins, elevating the risk of something untoward and unpleasant occurring.

There are nearly 10,000 different crypto coins, elevating the risk of something untoward and unpleasant occurring.CREDIT:BLOOMBERG

In a normal regulated market, like equity markets, Musk’s tweets would have prompted instant “please explains” from regulators, who’d also be poring over Tesla’s books, and Musk’s personal trading accounts, to see whether they traded ahead or after his comments.

In most securities markets market manipulation is a serious offence.

In fact there’s no suggestion that Musk did trade around his tweets. They simply reflect his rather eccentric personal style.

The US Securities and Exchange Commission’s new chair, Gary Gensler, has conceded that there is no regulatory framework for crypto assets and therefore no protections against fraud or manipulation. One would have thought it was about time that there was one.

That need becomes even more pressing because a range of institutions – fund managers and investment platforms – are starting to offer investors crypto assets and related products and therefore those assets and their markets are starting to become part of the mainstream financial system.

Regulation and regulatory oversight would, of course, undermine the core appeal of crypto assets – that ownership and activity is generally anonymous and unregulated.

The other factor undermining their appeal is the volatility.

It has been posited in the past that cryptocurrencies would provide a hedge against inflation and be a diversifier of risk, particularly equity market risk.

In practice neither of those has been proven. The extent of the volatility makes crypto assets a poor hedge against anything, including inflation, while the dominance of retail investors in the market is producing a correlation between the performance of cryptocurrencies and the “meme stock” end of the sharemarket.

Markets that are purely speculative or designed to hide activity from the authorities serve no public good so there’s not much to lose (other than some profits from speculation) by bringing the crypto markets into the daylight and regulating the activity within them.

Those retail investors who poured into the US market using their pandemic relief/stimulus cheques to relieve their boredom during the lockdowns – the Robinhood brigade who drove the GameStop short squeeze – are also a force in crypto markets.

It seems to be retail investors who, galvanised by Musk’s tweet about helping Dogecoin, poured into that market. A crypto created as a joke has had a market capitalisation of as much as $80 billion earlier this year. At one point on Monday it was up 50 per cent and, while it retraced some of that rise, the market for the coins is still valued at more than $US63 billion.

There doesn’t appear to be much of a difference being made between “meme” stocks and coins, even though the stocks, at least, have some intrinsic value.

With an increasing use of derivatives in the cryptocurrency markets to leverage bets – similar to the way retail investors have leveraged their exposures to GameStop and other meme stocks – trading volumes are reaching hundreds of billions of dollars a day.

The other aspect of the market that ought to concern regulators, and investors, is the explosion in the number of crypto coins that have been issued. There are nearly 10,000 different coins, elevating the risk of something untoward and unpleasant occurring.

It is, or at least should be, only a matter of time before trading in crypto assets is regulated in the same way as stocks, bonds, over-the-counter derivatives and commodities.

That would probably strip away the anonymity and freedoms that were the foundation stones for these markets, and a lot of “value” in the process.

Markets that are purely speculative or designed to hide activity from the authorities serve no public good so there’s not much to lose (other than some profits from speculation) by bringing the crypto markets into the daylight and regulating the activity within them.

No comments:

Post a Comment