In one of the largest tech acquisitions in history, Elon Musk bought Twitter Inc. (NYSE: TWTR), giving him control of the social-media network he had expressed interest in acquiring as early as 2017. Musk will take Twitter private through the deal. Shareholders including The Vanguard Group, Morgan Stanley and BlackRock will be paid $54.20 per share under Musk’s offer.
Musk is an avid Twitter user, sharing memes, Tesla news, and witty comments about his daily life with his 85 million followers.
Musk has never shied away from using the social media platform to share his love for digital assets. “The true battle is between fiat and crypto. On balance, I support the latter,” he said in response to someone asking him why people are mad at him for influencing crypto markets.
Will the crypto market be affected by a crypto-centric billionaire at the helm of the world’s most popular social network? It seems certain on the surface. Let’s dig deeper though.
The ‘Musk effect’
Elon Musk unexpectedly changed his Twitter account’s bio to #bitcoin in January 2021. In just a few hours, Bitcoin’s price rose from about $32,000 to over $38,000, boosting its market capitalization by $111 billion.
In March 2021, Musk tweeted that Bitcoin could be used to purchase Teslas. Bitcoin surged in value, reaching almost $65,000 within a month.
In December, Musk concluded his crypto tweet saga for 2021 with an announcement that Tesla would begin accepting DOGE payments for merchandise. Within two hours, Dogecoin’s price jumped more than 43%.
Tesla revealed its purchase of Bitcoin, accepted it as payment, eventually liquidated a portion of its BTC holdings, and ceased to accept it as payment – all of these actions have had a significant impact on the market, creating even more volatility.
A recent study from Blockchain Research Lab, an independent scientific research organization specializing in blockchain technology, proved the existence of the Musk effect in the crypto market.
This study analyzed the short-term impact of Musk’s Twitter activity on cryptocurrency returns and volumes using an event-study method.
The chart below shows cumulative log returns for cryptocurrencies around selected Musk’s tweets.
Study findings indicate that Bitcoin and Dogecoin prices react positively to the events, but the reactions differ significantly. Whenever Dogecoin is mentioned in Musk’s tweets, that currency experiences strong returns and trading volumes rise, while Bitcoin-related tweets are only associated with an increase in trading volume.
The authors explained that this is because Musk’s tweets about Dogecoin are mostly positive, while his tweets about Bitcoin have varied tones, which may cancel out both the positive and negative effects.
The price of Bitcoin bursts for a short time, followed by gradual gains for about 45 minutes. The gains then level off. Dogecoin’s price shows a quick and very large spike, followed by another 45 minutes of increasing prices. After that, the price returns revert to their initial levels. The events generally have a positive impact on prices that lasts at least two hours. The study concludes:
Musk’s tweets on cryptocurrency allow us to test weak-form market efficiency using event study methodology. The results clearly show that Musk’s tweets have significant impact on cryptocurrency markets in terms of pricing and trading volume, confirming our first research question.
Musk’s announcement of the takeover of Twitter triggered a 30% spike in Dogecoin’s price, which followed other meme coins’ price increases as well. However, the price then reversed, proving that the Musk effect on returns is transitory.
Decentralized future of Twitter
Among Musk’s first promises for Twitter is tackling censorship. In addition to new features, he pledged to soften Twitter’s stance on content moderation.
“Free speech is the bedrock of a functioning democracy, and Twitter is the digital town square where matters vital to the future of humanity are discussed,” Musk tweeted.
Free speech will not apply to scam bots or spammers – Musk is dedicated to eradicating them. Twitter is awash in crypto scams and spams, creating a real barrier to adoption of crypto as people constantly encounter bad actors and therefore lack trust in digital assets.
This problem hasn’t been seriously addressed before, so if Musk handles it, it will benefit the entire industry.
Another promise Musk made for Twitter was to make it open source, or available for the public to view and improve. In a poll, Musk asked his followers if they would support an open-source algorithm. More than 1.1 million respondents said yes.
On the surface, Twitter’s ownership transition from shareholders to a single billionaire seems to increase the company’s centralization. However, when you look at what these shareholders are – like The Vanguard Group who owns Bank of America, JP Morgan, and manages tech giants such as Apple, Microsoft, and Alphabet – you can see that they represent a much more centralized power than Musk and that they are notorious for opposing any decentralized effort.
Musk’s commitment to making Twitter a more community-oriented platform along with his vision to make the world a better place make Musk’s takeover seem like more of a decentralization effort. While his cryptocurrency-related tweets have a short-term effect on investor behavior in cryptocurrency markets, he is more likely to have a long-term positive impact on the cryptocurrency market as the owner of Twitter.
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