About Musk Effect
Musk Effect is named after Elon Musk. The effect explains about How Elon Musk’s tweets affect the cryptocurrency market. This effect came into existence in the year 2021. From his tweets, Elon musk boosted the famous cryptocurrency Bitcoin initially. The twitter activities of Elon Musk have greatly influenced the cryptocurrency market.
Elon Musk is a recognized personality who is the founder of PayPal and the CEO of the famous Tesla Motors and SpaceX. “Musk Effect” or “Elon Musk Effect” is also called the Billionaire Effect after Elon Musk posted a series of tweets. This effect came into existence when Musk used #bitcoin for his account description on Twitter followed by a tweet that said: “In retrospect, it was inevitable.” In no time the Musk Effect became a great viral in the cryptocurrency markets as the price of Bitcoin gained from about $32,000 to $38,000 in January 2021. During that time, it was still unknown to the public that the automaker Tesla had made a substantial investment in Bitcoin.
Six twitter events by Elon Musk initiated the Musk Effect. These events were made in the form of tweets which a large amount of audience or Twitter followers of Elon Musk observed. The tweets fired up the cryptomarket. The tweets highlighted two major cryptocurrencies – Bitcoin and Dogecoin.
Explanation of the Effect
As per the model assumptions, the abnormal return could be fully attributed to the unforeseen event, i.e in this case it explains the ‘Musk Effect’.
Volume data relating to Trading and Price were gathered for the cryptocurrencies Bitcoin and Dogecoin and the respective effect of each event was quantified. Significant abnormal returns were observed for four out of the six events. Significant positive abnormal trading volumes were observed for all six. The first tweet where the Twitter bio was adjusted to ‘#bitcoin’ and the other tweet ‘One word: Doge’ led to enormous abnormal effects.
In the ‘#bitcoin’-tweet, the substantial abnormal return of Bitcoin amounted to 6.31% in a timed lap of 30 minutes from the moment Elon Musk changed his Twitter bio. This abnormal return raised to 18.99% over a period of just four hours. In respect to the Dogecoin-tweet, the abnormal return was 8.16% after just five minutes and increased immediately after sixty minutes to 17.31%.
The above two results depict the significant influence that influential people can have on cryptocurrency markets. It cannot be identified the extent to which the tweets were intended to be. A likely view of this ‘Musk Effect’ is that it depicts an uncritical aspect of the efficiency of financial markets. The weak form of the market efficiency hypothesis defies that markets show all available information. Consequently, the cryptocurrency market—efficiently—reflects this recently available information. Therefore, an effect does only occur if the information is significant.
