Cryptocurrencies have been around for roughly a little over a decade but never have they captured the public’s popular imagination as they have in 2021, thanks to the spectacular rise in their prices led by Bitcoin, which at some point recently had risen more than 500 percent in five months.
The wider public interest in Bitcoin and other cryptocurrencies has also given rise to other phenomena, such as the rise of various prophets (and doomsayers) who keep their audiences hooked by preaching their beliefs (or disbelief) in the asset class and outlining their views on its outlook.
But no person in recent history has captured as much mindspace because of their views on a particular asset class as Elon Musk has for his statements on Bitcoin.
The famed entrepreneur, who rose to briefly become the world’s richest man a few months ago thanks to a Bitcoin-like rally in the share price of Tesla, has caused a wild swing in the price of cryptocurrencies by tweeting his, alternatingly, positive and cautious views on Bitcoin. This has resulted in much elation and despair for investors in Bitcoin and other cryptocurrencies.But investors should realise that Elon Musk’s beliefs shouldn’t be held up as the answer to questions about the potential (or risks) of cryptocurrencies.
When the pseudonymous Satoshi Nakamoto, the mysterious creator of Bitcoin, first revealed the idea behind the cryptocurrency, it promised to change the way money worked.To many, Bitcoin was the third big change in the history of the monetary system after the switch from barter and gold to gold-backed paper currency centuries ago and the abolition of the gold standard following World War Two.Bitcoin offered the potential to remove transnational barriers across, allow for secure transactions and guaranteed settlements, and a semblance of privacy to its users, besides a check on inflation thanks to its finite nature and lack of a central authority overseeing its supply.
And for several years, the Bitcoin investor community pored over these discussion points, weighing the virtual currency’s merits versus its potential downsides such as the high energy consumption required to mine, or settle, transactions.All that was till the cryptocurrency shot through the roof this year, with excitement over Bitcoin’s potential giving way to mania as a vast swathe of new users hopped on to the bandwagon thinking of the virtual currency as a get-rich-quick scheme.
It is for many of these users that Elon Musk appeared as a prophet, first tomtomming the benefits of the virtual currency, even announcing that not only Tesla would accept car purchases in Bitcoin, the automaker had purchased the virtual currency worth about USD 1.5 billion.Cut to a few weeks later, and Musk backtracked on his comments, saying that he was still optimistic but expressed concern about the high energy usage of Bitcoin.Musk pronouncements caused wild gyrations in the price of Bitcoin, underscoring to investors the risks of hitching your ride to the wagon of superstar investors.
In December last year, Musk first tweeted about Bitcoin when its price was about $28,000. More vociferous tweets followed this year followed when Musk added #Bitcoin to his Twitter bio. This, along with Tesla’s announcement, triggered a superb rally from $38,000 to about $64,000.
Musk then reversed his stance, causing the cryptocurrency to halve within days to about $32,000. The latest? Last night, Musk announced: “When there’s confirmation of reasonable (~50 percent) clean energy usage by miners with the positive future trend, Tesla will resume allowing Bitcoin transactions”. The price of Bitcoin rose to about $39,000 following the latest announcement.The takeaway from the brouhaha is this. If you have invested, or are thinking of investing, in Bitcoin, remember that the thing with superstar investors is: you are not familiar with their thinking or their agenda and that they can change their stance at will.
The legendary investor Warren Buffett once said: do not invest in what you don’t understand.Existing and potential investors in cryptocurrencies would do well to remember that advice. That much of their time should be spent trying to understand the promise of Bitcoin and the risks to that hypothesis.Anything else is speculation and should be dealt with according to the rules of speculation. Which is that risk management is important, such as understanding the capital you are risking and potential losses you could face. And if you’re in for the price action, make sure you understand it well through tools such as technical analysis.