What Bitcoin’s Link With Tesla Means For Public Trust In Our Financial Markets

Cryptocurrencies are experiencing a lot of volatility, and there are certainly many factors behind this — China doubles For example, when it comes to cryptocurrency crackdowns, the most visible and widely debated factor could be Elon Musk. Elon Musk’s tweets seem to move the crypto market with almost one hand.

Bitcoin value soars It plummeted when Musk announced that Tesla would accept Bitcoin as a payment method, and only a few months later. After he tweeted Tesla will not accept cryptocurrencies due to its environmental impact.then Slight recovery It recovered a bit more after Musk tweeted that Tesla wouldn’t sell its Bitcoin stake (Within just a few minutesAfter tweeting that he met with Bitcoin miners to discuss the sustainable energy use of digital currencies.

Bitcoin investors may be sighing relief in the short term, but all this volatility is a single individual tweet (or just a mere individual tweet). Change to his Twitter bio) Points out a bigger problem not only for investors, but also for the long-term health and integrity of the market, and thus for economies that want a catastrophic recovery. Of a pandemic.

4 factors of bubble and crash

Published in 2019 “Bubbles and Crashes: Innovation Boom and Bust“Here we take a closer look at the major innovations of the last 150 years and identify four factors that increase the likelihood of speculation in a particular technology.

The first is uncertainty. Without uncertainty, everyone knows what will happen, so there is no speculation or bubble. The second factor is the presence of novice investors, often associated with innovation, which can inflate the bubble. For example, the increased availability of telephones in the 1920s allowed people to trade from remote locations across the country, allowing for a large influx of new investors.

Third, we need a target of speculation. Both the highly uncertain EVSPAC and Bitcoin are good examples. Fourth, you need a story. This is a broader socio-economic story (eg EV saves the planet), or a more focused investment-centric story that connects novice investors to speculative targets and reduces perceived uncertainty (eg). Bitcoin can enrich you).

Bitcoin and cryptocurrencies are this bubble model of steroids as we enter the present moment.given that Bitcoin fate is now linked To Tesla as a result of Mask’s actions, and by extension Link to stock market Overall, this can be a serious problem.

What happens when Bitcoin is linked to Tesla

Elon Musk is not the only factor behind cryptocurrency volatility, or the way they correlate with the current common stock market, but using musk as an example explains why this is a problem. Especially useful for explaining.

Photo: AFP / Martin Bureau

Part of the problem with Bitcoin being linked to Tesla is that both are overvalued, especially Tesla’s overestimation has two consequences. One is that it leads to pricing mistakes in SPACs and other EV-related securities.Companies like Lordstown Motors and Nicola Motor Company saw Tesla and said, “Tesla Equivalent to $ 800 billion, And my EV company should be worth at least billions of dollars, despite having no products and zero revenue. “

Research Announced this year, the rise in Tesla shares in 2020 actually led to incorrect pricing of EVSPAC through the “Tesla effect.” Second, Tesla’s overestimation is boosting the value of the mainstream automotive industry.Tesla is now worth more Top 9 automakers in total.. In this current climate, Tesla’s value cannot be reduced, so the value of other automakers will only increase accordingly. In other words, the irrational speculation behind Tesla stocks and Bitcoin has infected many of our securities.

Think Tesla has now Participate in S & P500 and it is All moves for $ 11.11, Tesla shares move S & P500 by 1 point. The latter has a market capitalization of about $ 30 trillion, of which Tesla is currently $ 600 billion, making up a significant proportion of many people’s retirement. If Tesla shares plunge, it will have a big impact on the S & P 500 — not a comforting idea.

Questions we need to ask

What does this mean? That probably means there are some bubbles. Unfortunately, even if we know we’re in a bubble, we don’t know much about when it pops. Also, the bubble can continue to inflate for long periods of time. In the meantime, we need to ask ourselves some questions.

First, how do you track the bubble?We have already seen some Personal expenses Associated with this latest set of novice investors. When will the signs of the bubble we see now shift to a truly dangerous situation where retail investors are about to be crushed?

Social listening tools, including private sector platforms, especially university-based so-called social “observatories,” may be able to provide advanced warnings about the cracks in the bubble we live in. This is still a very early science, but the “meme strain” shows several cycles of stock movement and takes a long time to investigate, but the “tool” that online promoters use to attract and engage Will gradually come to be understood. And finally, speculative investment. What is pre-warned is, hopefully, pre-warned.

Second, how to balance the huge profits of aggregating capital and opinion with the costs of individual investors whose savings can be swept away by the crowd. Will it be regulated? The same retail-led enthusiast that inflated Tesla has spread to cryptocurrencies, so-called “meme” stocks such as GameStop, and the wider market, whose prices do not reflect the value of the underlying asset. This exposes many retail investors when the music stops.

Regulatory reform is more problematic. Expect regulatory solutions to current market conditions as our government system is hampered by seemingly unruly gridlocks and is itself underpinned by some of the mechanisms that transform our market. Should not be done. Needless to say, even strong regulatory compliance can be too late, for example, if the new SEC Chair, Gary Gensler, tries to implement it. And no one in public life wants to be a bubble popper.

Despite these warnings, public action is needed, perhaps on an intergovernmental scale. Given the role of crypto as a payment platform for illicit activity, enforcing disclosure, transparency and trustee requirements to users of the platform and cryptocurrencies stabilizes these markets in the event of an unavoidable crash. May be useful for.

What is clear is not only market transparency, but also market transparency when waiting for this expansion and rupture process to occur and passively monitoring it, especially when this rupture has a meaningful impact on everyday investors. The legitimacy has been doubted. Our financial markets are a fundamental part of the capitalist system of the 21st century. Public confidence in the market is important for the efficient allocation of capital to productive uses, and market integrity is essential to that trust. Ensuring the trust of a wide range of market participants is important in maintaining a capitalist system that has done much to improve human condition.

(Dr. David Kirsch and Dr. Brent Goldfarb are both professors at the University of Maryland’s Robert H. Smith Business School.)

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