A Look Into Crypto Volatility: Elon Musk and His Relationship with Dogecoin

It should come as no surprise that one of the tradeoffs within any financial market is its volatility. It’s simply a natural part of market activity, which can prove to either present immense risks or rewards. Usually, investors calculate a market’s volatility — understanding whether it’s healthy or extreme — through the use of a volatility index (VIX), better known as the “fear gauge”.

However, the same principles don’t apply to cryptocurrency markets. At least, not yet. It’s still unclear if the volatility of crypto will eventually mimic the patterns present in more mainstream assets. For now, however, it’s safe to assume that crypto volatility is in a league of its own.

To paint a better view, you need not look further than Elon Musk and his relationship with meme coins; more specifically, with Dogecoin (DOGE). It’s not often that cryptocurrencies have a familiar face to back them up, and certainly not the face of the billionaire founder and CEO of Tesla and SpaceX. But Dogecoin’s rise can be attributed exactly to this fact.

The once-neglected and unheard of meme coin has surged by more than 14,000% since the start of the year after Musk — and a few other celebrities including Snoop Dogg — put it in the spotlight. According to CoinMarketCap, DOGE is currently the fourth biggest digital currency with a market capitalization of $62,735,805,052 at the time of writing.

What once started out as a joke on social media has now turned into every speculator’s dream. As with any investment, however, it’s still best to exercise caution. Musk undoubtedly has the power to move the prices of a cryptocurrency with just a simple tweet. Even financial commentators have questioned whether this was a responsible thing for him to do.

“I think he’s having a lot of fun … He can say anything he wants about dogecoin or cryptos fully aware that just him saying something moves the price,” said Georgetown University’s McDonough School of Business associate professor James Angel, a specialist in financial markets and cryptocurrencies.

“Anyone who wants to play the Elon Musk game should be prepared to lose all their money.”

During Musk’s guest-host spot on “Saturday Night Live” last week, he mentioned Dogecoin throughout different segments of the show. It was in his opening monologue with his mother, Maye Musk, who appeared asking what he got her for mother’s day:

“I’m excited for my Mother’s Day gift,” said Maye Musk. “I just hope it’s not dogecoin!” “It is,” said Elon. “It sure is.”

And then later in a sketch when a cast member asked what dogecoin was: “It’s the future of currency. It’s an unstoppable financial vehicle that’s going to take over the world,” said Musk.

“So, it’s a hustle?” asked Michael Che. “Yeah, it’s a hustle,” Musk replied, which essentially shattered investors’ dreams of hoping that his spot would turn out to be another “buy the rumor/sell the news” strategy.

In anticipation of Musk’s appearance on SNL, the value of DOGE was slowly being pumped up by investors. On Saturday morning, it reached 70 cents and went down to 66 cents just before the show went on air. Due to his “hustle” comment, Dogecoin fell to 44 cents translating to a 36-40% drop the day after his guesting.

Quite recently, Musk’s SpaceX unveiled its plans to launch a mission primarily funded by Dogecoin, called the “DOGE-1 Mission to the Moon”, in the first quarter of 2022.

On the flip side, Musk’s Tesla announced on Wednesday that it will no longer accept Bitcoin for car purchases. This led the biggest cryptocurrency to slump by more than 10%.  The reason behind this move was the unsustainability in how Bitcoin is being mined, which requires extensive amounts of electricity.

Tesla began accepting Bitcoin as payment in March. It’s important to note that the company also acquired $1.5 billion of bitcoin in February, driving a 20% surge in cryptocurrency. The current process behind Bitcoin mining generates the same amount of energy as the Netherlands did in 2019.

In this light, Elon Musk’s latest tweets suggest that Dogecoin might soon take Bitcoin’s place as a suitable replacement. Consequently, this caused the price of DOGE to jump to over 50 cents apiece from 43 cents.

“Working with Doge devs to improve system transaction efficiency,” Musk tweeted on Thursday. “Potentially promising.”

Regardless, Tesla is still holding on to its Bitcoin holdings. Should mining shift to more sustainable energy sources, then the company would again use the cryptocurrency.

Cryptocurrencies, in their entirety, are extremely volatile. No doubt about it. Whether this indicates healthy market volatility, however, is still difficult to say. Crypto investors can observe record-high peaks one minute and go through record-low troughs in the next. It’s all in a day’s work. Suffice it to say, choose your investments wisely!

References: Reuters, Nikkei Asia, MarketWatch, CoinMarketCap, CNN Business, The Guardian, Gemini