Elon Musk Is Why I Don’t Buy Cryptocurrencies

The market manipulation is right in front of your face

A conversation about cryptocurrencies is incomplete unless you mention Elon Musk. The Tesla CEO frequently thrusts himself into the crypto conversation with tweets sharing his opinions about cryptocurrencies and how Tesla plans to enact them within their business model.

Tesla has always been a headline company, but it reached new heights in 2020 as its stock minted many millionaires. Shareholders were heavily rewarded for their patience as the stock provided more than a 900% return for shareholders in under a year.

Right now, Musk has the Midas Touch…anything he touches turns into gold. It’s an incredible perk, but also a scary one for people who don’t know what he’ll say next (note: everyone but him).

Consider a single tweet he sent about Etsy. The tweet gave Etsy’s stock price an instant 10% boost.

The company didn’t announce any significant news, and those gains were in significant contrast to the market’s down day (although Etsy did end the day in the red as well. People caught on that Etsy’s price increase that day didn’t make much sense).

Etsy has other catalysts beyond Musk’s tweeting. You can make the argument Etsy is overvalued or undervalued depending on how you interpret their current valuation and future opportunities.

Cryptocurrencies are different. They’re harder to value. The only three valuation metrics I’ve heard of are how much widespread the coin can potentially be in a few years, the current coin supply, and Elon Musk’s tweets. For example, as more vendors accept payments in a cryptocurrency, that coin’s value goes up. Furthermore, a listing on Coinbase will make the currency easier to access (i.e. Dogecoin). However, supply is another factor. While there are only 21 million Bitcoins in the world, there are 129 billion Dogecoins in the world.

Bitcoin is more valuable in part because there are fewer coins available. A massive supply of any good will lower its price point. A high demand can counter a massive supply, but 129 billion Dogecoins is quite a lot of supply.

The 1 year charts are beautiful, and if something yields returns like Bitcoin or Dogecoin, you have to at least consider it. But then they are Elon Musk’s tweets.

Bitcoin soared when Musk let people use the cryptocurrency to buy Tesla cars. It was a confusing move on Tesla’s part considering how Bitcoin’s destructive effect on the planet sharply contrast Tesla’s mission. To Musk’s credit, he changed course, but he only did so a few weeks later. Tesla also booked in $101 million in profits before the announcement by selling off some of its Bitcoin position.

This is where things get sketchy.

That $101 million profit from the Bitcoin transactions juiced Tesla’s profits to $438 million for Q1 2021. Without the Bitcoin sale, profits would have only been $337 million, roughly 25% less than if they didn’t sell Bitcoin for a profit.

But hey, at least the cars brought in the other $337 million, right? Well, not exactly. Emissions credits accounted for $518 million in revenue during that quarter. Tesla gets these credits because they produce electric vehicles, and the government wants to reward that initiative. However, it’s a bit misleading to think the company is actually profitable from their business model alone.

The cars themselves don’t bring in the profits. It’s the credits and cryptocurrencies. This can become a problem if the government reduces or stops awarding these credits to Tesla (i.e. every automaker increases their electric vehicle production…something that is already happening) or if cryptocurrency prices plummet.

At their current state, it seems like cryptocurrencies are invincible…as long as Elon Musk keeps tweeting good things about them. When he made the announcement to no longer accept Bitcoin payments for Tesla cars, the cryptocurrency move sharply downward on the tweet alone.

A strategic pump and dump can considerably cook the Tesla books as we saw in the first quarter of 2021. There’s a big difference between reporting $337 million in profits versus reporting $438 million in profits. The $101 million Bitcoin transaction shouldn’t have been included in Tesla’s profits, but why report the less attractive number when you can just as easily report the more impressive number?

There’s a level of manipulation in practically every investment. The people with the most money typically exert a greater force on the market than retail investors with the exception of Wall Street Bets fueled short squeezes. However, when one person seems to sway an asset’s entire market price, I get incredibly cautious.

I don’t have that level of trust with my money. Just because something shoots up 10X (or much more than that) very quickly doesn’t mean it will continue growing at that rate. If you want to invest in cryptos, I’d recommend staying away from the ones Elon Musk keeps tweeting about. Then again, I’m not a crypto fan. Musk’s tweets only fuel that sentiment for me personally.

Want to learn how to make money investing in the stock market? Join the “Become A Better Investor” newsletter today.

Source: https://medium.datadriveninvestor.com/elon-musk-is-why-i-dont-buy-cryptocurrencies-1e2f20e60e70?source=rss——-8—————–cryptocurrency