Bitcoin’s Musk effect: Research shows how Elon moves cryptocurrency prices

The effect of celebrity tweets on the cryptocurrency market has become a topic of study for researchers after a week in which Elon Musk triggered sizable price surges for both Bitcoin (BTC) and Dogecoin (DOGE).

Blockchain Research Lab published a paper on Jan. 3 titled, How Elon Musk’s Twitter activity moves cryptocurrency markets. The paper looks at six occasions when Elon Musk tweeted about cryptocurrency and attempts to measure the resultant impact on the trading volume and spot price of the coins in question.

“We investigate the impact of Elon Musk's Twitter messages on cryptocurrency markets. By applying event study methodology, the impact of six Twitter events from 2020 and 2021 on return and trading volume of the mentioned cryptocurrency is analyzed,” the paper states.

Of the six tweets, four were related to Dogecoin and two were related to Bitcoin. The paper concludes that all six events had an impact on the trading activity of both cryptocurrencies, specifically their trade volume:

“Across all events, we identify significant increases in trading volume that are attributable to the events.”

The biggest impact the paper notes on Dogecoin came in December, soon after Musk sent out the tweet: “One word: Doge”.

Prior to the tweet, Dogecoin was being traded around nine times per minute, with an average trading volume of $1,942. In the 30 minutes immediately following the tweet, trade volume jumped to $299,330 per minute and the number of trades climbed to 775, the paper states.

Not every tweet sent out by Musk affected the price of Doge or Bitcoin, but two did result in significant “cumulative abnormal returns.” 

“Four of the Twitter activities are likely only reactions to previous market events and relate to little or no significant price reactions. The other two events, however, do not seem to be reactions but independent actions which result in huge increases in trading volumes and large and significant positive abnormal returns,” the paper states.

The biggest impact Musk had on Bitcoin came on Jan. 29, when the SpaceX and Tesla CEO added the word “Bitcoin” to his Twitter bio. As reported at the time, the value of Bitcoin surged within minutes of the new addition to Musk’s Twitter profile, and climbed nearly 20% in the hours following:

“Musk’s Twitter biochange to #bitcoin resulted in significant CAR of 6.31% over 30 minutes, which increased to 13.19% over one hour and peaked at 18.99% over a period of 7 hours. [His tweet] One word: Doge resulted in significant CAR of 8.17% over a window of five minutes, peaking at 17.31% over the period of one hour.”

So far, Musk’s dalliance with cryptocurrency has been nothing but positive, and, with the frequent use of memes, even funny. However, as the paper states, analogous research in other markets has already shown that the capacity for influencers to negatively impact the value of an asset via social media posts is also very real:

“While Musk's behavior and communication can be deemed positive or funny in nature (and therefore arguably uncritical), similar research has already revealed that negative tweets can also have a negative impact on financial returns.”

The researchers acknowledge that the issue of influencing markets is not native to the cryptocurrency space. The same problems exist in the stock market and did so long before the GameStop saga triggered by collective traders on r/Wallstreetbets.

Addressing the issue of public influencers is an ominous task and one which would undoubtedly broach the question of freedom of speech. Yet, as the paper concludes, the difference between the ‘right’ tweet and the ‘wrong’ tweet could be hundreds of billions of dollars.

“Our results lead to the question under which conditions people in the public eye should comment on specific cryptocurrencies. If a single tweet can potentially lead to an increase of $111 billion in Bitcoin's market capitalization, a different tweet could also wipe out a similar value,” the paper ends.