The crypto market is ruled by influencers, who can easily lift or drop the price of any cryptocurrency by putting out related news. The king of crypto influencers is, without a doubt, Elon Musk. Alone with his huge media influence, he is said to be able to impact Bitcoin and Dogecoin.
Elon Musk is also known as a person who was fined by the US Securities and Exchange Commission for manipulating the price of Tesla shares by his tweet in which he said that he was going to take Tesla private. What’s interesting is that any sentences about Tesla are only a tiny share of everything he said that could potentially impact the price of cryptocurrencies but, due to the lack of regulation in crypto markets, these cases still haven’t drawn a lot of attention. So the question is, how long the realm of crypto will remain unregulated.
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What does market manipulation mean?
In a more popular understanding, we are talking about misinformation. The main priority that regulators have when it comes to protecting the market in securities and commodities is that the markets are "fair" and that everybody has equal access to information. A market with the so-called "perfect information", which guarantees that everybody has access to complete information, creates a perfect allocation of capital to the best companies that will produce the higher return on that capital, therefore maximizing the overall economic growth. For example, suppose investors believe that Apple can create more economic value than Alphabet. In that case, Apple is priced higher on the market, which allows it to attract more capital at better terms.
Of course, there is no perfect information in reality, and any person is not realistically able to aggregate and process all the information. This is why there's a need for a fair market, which works like a collective brain of the society, aggregating knowledge and skills from multiple individuals and entities. At least until market manipulation comes into play.
Market manipulation happens when somebody distorts the market information. For example, a trader or even the issuer may create fake volumes to make the asset seem liquid. In reality, this can easily turn out to be a pump-and-dump scheme, in which case the price is artificially increased only so that beneficiaries of the scheme could sell the large volumes of an asset, bringing the price back down.
Information asymmetry and the protection of ordinary investors
Another criterion for regulating markets is the support of "fairness". For efficient asset pricing, as many traders as possible must participate in the process. Moreover, higher participation rate means that more capital is being utilized.
Fairness of the markets is a critical requirement for many traders as it reduces the risk of engaging in trading, which itself is already relatively high. Insider trading does not strictly violate the fact that assets should be priced based on market information because trades based on insider information actually make a price take that information into account. However, as this information is not publicly available, other traders cannot benefit from it, which makes markets unfair and scares many potential traders away.
On the other hand, insider trading does not benefit the markets significantly because of at least two reasons. The first is that each piece of information may be interpreted in several ways. If it is processed by a single person or a narrow group of people, the interpretation of this information is not averaged enough and still skews the correct asset price. Secondly, usually, insider information has a minimal lifetime of being not public, so the impact of its non-availability on the movement of capital is very limited.
The lack of investor protection is one of the reasons why we have launched Stobox Crypto Exchange. Many people do not start investing in crypto due to the high risks involved. Furthermore, the prevalence of market manipulation is one of the main reasons why crypto is not developing the way the community wants. Understanding this issue, the Stobox team intends to make Stobox Exchange a safe space in the wild west of crypto by conducting a more severe selection of projects and excluding dark patterns from the exchange functionality. Efficiency and fairness of markets is a goal Stobox is proud to be contributing to.
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Can Elon Musk be Accused of Bitcoin Market Manipulation?
There are three questions requiring answers to understand how Elon's actions need to be classified. The same questions should be asked regarding the promotion of tokens done by other influencers.
Have the tweets really impacted the price of cryptocurrencies?
The first and foremost question is whether the tweets had actually impacted the price of cryptocurrencies. The general media consensus is that there is a correlation between some of Elon Musk's tweets and certain price movements. For Dogecoin, the evidence for price impact is overarching. However, at the time of writing there hasn’t been academic studies on that topic.
Have the tweets been misleading or manipulative?
All tweets can be divided into two types: those relating to factual information and others. With the former, it's pretty easy to find out whether they are misleading: if Musk claims Tesla is working on new tech for Dogecoin, while it is not in reality, this is clearly misinformation that can be verified.
It's much more complex to classify other tweets, such as the famous "breakup tweet", which is simply a hashtag Bitcoin and an emoji of the broken heart. Although it implies that Elon stops supporting Bitcoin, it does not offer specific factual information. Moreover, if Elon actually stops supporting BTC, and this support is a pricing factor on the cryptocurrency market, this may be regarded as objective information that traders have to take into account.
The crypto markets are weird because many tokens do not have an objective price beyond speculative supply and demand, much of which may be driven by the opinions of celebrities. Most likely, regulators will want crypto to function as "fair and orderly" makers, so there will be measures preventing such an impact. However, it's hard to tell what those measures would be and how they can be implemented, given that people can often impact the price without intending to. It takes into account the presumption of innocence and freedom of speech. In countries like the US, much will depend on court precedents.
Have there been price impacts used for personal gain?
All of the complications mentioned above vanish if only one factor is present. This factor is personal gain.
If the price impact of a tweet had been used for personal financial benefit, the given case is an indication of insider trading and is likely to be punished with a larger introduction of crypto regulation if the regulation is similar to the one of traditional markets. This also includes the promotion of the token without notifying the public that the person is paid to do so.
From what we have gathered, crypto market manipulation will be increasingly becoming less probable. Living in a digital era and informational society, it’s easier to spot manipulations of any kind. Attracting more investors and making the issuance of crypto-assets more feasible for a wide range of businesses all over the world is easier when you know you’re safe. If you wish to find out more about possibilities to conduct your business in a safe and convenient way, feel free to request complimentary 30-min consultation.