Musk Does It Again! - Are Cryptocurrencies Really a Safe Investment?
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Musk Does It Again! – Are Cryptocurrencies Really a Safe Investment?

On Wednesday night (May 12th) Tesla Chief Elon Musk made the announcement on Twitter, that the car manufacturer would no longer be accepting Bitcoin as payment. Following the tweet, the price of the cryptocurrency fell dramatically, from $52,491 to $46,980 in the space of an hour.

Musk explained in the tweet:

“Tesla has suspended vehicle purchases using Bitcoin. We are concerned about rapidly increasing use of fossil fuels for Bitcoin mining and transactions, especially coal, which has the worst emissions of any fuel.

Cryptocurrency is a good idea on many levels and we believe it has a promising future, but this cannot come at great cost to the environment.

Tesla will not be selling any Bitcoin and we intend to use it for transactions as soon as mining transitions to more sustainable energy. We are also looking at other cryptocurrencies that use <1% of Bitcoin’s energy/transaction.”

Elon Musk – Twitter
Musk Does It Again! - Are Cryptocurrencies Really a Safe Investment?
The price of Bitcoin over 24 hours – Source: coinmarketcap.com

This comes after the billionaire’s appearance on the American TV show SNL last weekend. He referred to the cryptocurrency dogecoin as a “hustle”; subsequently, the digital currency’s value dropped by nearly 40%. The price of Dogecoin reached an all-time high in the week running up to Elon’s SNL appearance, with many traders convinced a skit about the coin would be featured and send the prices even higher. Dogecoin has already started to bounce back, but the question remains, are cryptocurrencies a safe investment when one person can have such a significant impact on their value?

The Musk Effect

This is not the first time that Musk’s comments have had a significant impact on the price of cryptocurrencies; in fact, he has a history of sending prices sky-high from just one tweet, dubbed as “The Musk Effect”. With more than 53 million followers, Musk has an enormous amount of influence; even with his insistence that he’s only “joking” when tweeting about cryptocurrencies like Dogecoin, his tweets still send traders into a frenzy.

The self-proclaimed “dogefather” is thought to be one of the biggest reasons for the significant growth in popularity and value of Dogecoin, created initially as a joke in 2013. Recent tweets from Musk have sent the currency’s price soaring.

On January 28th 2021, Musk tweeted a mock-up of a Vogue magazine cover, renamed “Dogue”, which skyrocketed prices up 682% in the space of 48 hours. Since then, there have been many Dogecoin related tweets from the billionaire, which resulted in rising value for the cryptocurrency.

The following day, Elon changed his Twitter bio to #bitcoin, which saw prices rise 14% within an hour, from $32,000 to $38,000, proving that the Musk effect is not just prevalent for Dogecoin. The entrepreneur has consistently tweeted about Bitcoin, almost always having an impact on the price.

This was especially the case back in February of this year when Musk tweeted that the price of Bitcoins “seem high”, leaving prices of the coin down 17%. The day before this tweet, the digital currency’s price had reached an all-time high, at $57,469, then dropping to $48,898 in the days following Musk’s comment.

Just a couple of weeks before this tweet, Elon’s company, Tesla, had purchased $1.5 billion in Bitcoin and had set out plans to accept the currency as payment for its vehicles. Many believe this was a major contributing factor in February’s enormous Bitcoin price rise.

These are just a handful of examples of the billionaire’s comments; in fact, he seems unable to stop tweeting about the cryptocurrencies, having this week started a Twitter poll asking his followers if they want Tesla to start accepting Dogecoin.

So How Do Cryptocurrencies Actually Work?

HMRC defines cryptocurrencies as:

Cryptoassets (also referred to as ‘tokens’ or ‘cryptocurrency’) are cryptographically secured digital representations of value or contractual rights that can be: transferred, stored, or traded electronically.

But what does this mean? Whilst now most people have an awareness of cryptocurrencies, especially the most popular, such as Bitcoin, it is fair to say that very few people truly understand what these digital currencies are and how they work.

Cryptocurrencies are decentralised digital currencies secured through cryptography. This is a way of protecting information through the use of codes. There are now thousands of these digital assets designed to cut out the need for the “middleman”, such as a bank or other financial institution.

One of the most complicated things about these digital currencies is that they all follow different rules; whilst there may be similarities, no two are exactly the same. Some are finite, such as Bitcoin; currently, there are just over 18.5 million Bitcoins in circulation. However, there is a limit of 21 million Bitcoins. Once this number of coins are in circulation, it will be impossible for anyone to mine anymore.

“The Bitcoin mining process rewards miners with a chunk of bitcoin upon successful verification of a block. This process adapts over time. When bitcoin first launched, the reward was 50 bitcoins. In 2012, it halved to 25 bitcoins. In 2016, it halved again to 12.5 bitcoins. As of February 2021, miners gain 6.25 bitcoins for every new block mined—equal to about $294,168.75 based on February 24, 2021, value. This effectively lowers Bitcoin’s inflation rate in half every four years.”

Investopedia

Dogecoin, however, has no limit on the number of coins able to be mined; there are currently around 129 billion in circulation.

With regular currencies, such as the British Pound, the Bank of England puts new banknotes into circulation each year to replace unfit ones and meet any demand increases. This is not the same for cryptocurrencies, “mining” is the only way for new coins to come into circulation.

You can find out more about how mining of cryptocurrencies works on ITpro’s guide – What is cryptocurrency mining?

Is Anyone Else as Influential When It Comes to Cryptocurrencies?

While many other celebrities endorse cryptocurrencies, none seem to have the same effect as Musk. The exact reason for this is unknown; however, it is likely due to the fact that an immense number of these celebs are doing it for financial benefit, many are paid as influencers by trading platforms, or have some other sort of vested interest.

Another vital reason these celebrity endorsements have such little impact is thought to be due to a lack of relevance and trust. A music star recommending a trading app may make a few fans sign up, and whilst these influencers may understand cryptocurrencies, it is tech giants like Musk, and Jack Dorsey, the CEO of Twitter, who hold real influence. The public will have more confidence that they understand the topic.

However, a few other people possess strong power over the value of some of the biggest cryptocurrencies; the problem is that nobody knows who they actually are.

Let’s start with the creator of Bitcoin. The founder of Bitcoin is only known by a pseudonym, Satoshi Nakamoto. Nobody knows his true identity, though there have been many guesses over the years. Dorian S. Nakamoto, an engineer and LA resident, was the first person thought to be the mysterious founder; however, he has repeatedly denied these claims.

Another suspect is Craig Wright, an Australian entrepreneur who claimed himself to be the Bitcoin creator in 2016; however, this was met with massive scepticism from the online cryptocurrency community, plus Wright gave no genuine proof. There is also repeated speculation that cryptocurrency expert Nick Szabo is the founder, but he has also outright denied this.

One of the biggest and more recent theories is that Elon Musk himself was the creator of the cryptocurrency, a claim he denies.

No matter the true identity of Satoshi, the founder holds 1 million Bitcoin, placing him number 1 on “The Crypto Rich List”. With this substantial amount of Bitcoin in his possession, he has tremendous power, for if he were to start selling his stash, every Bitcoin holder would panic. Within minutes, there would be chaos; everyone would be trying to sell their coins, the market would be flooded, and the price would tank.

Whoever Nakamoto is, they hold the ultimate control over the value of Bitcoin and essentially could cause investors to lose millions.

There is also a similar risk around Dogecoin; the top 100 dogecoin addresses own around 67% of the total Dogecoin supply. With one ‘Dogecoin Whale’ holding $22 billion worth. Back in February, Musk warned that this concentration of coins is the biggest risk facing the currency.

Are Cryptocurrencies Safe?

Cryptocurrencies have become immensely popular over recent years; there are now over 106 million crypto users worldwide; many of these users are amateur traders, with some taking substantial financial risks.

A mixture of luck and knowledge can make cryptocurrencies a worthwhile investment, and there are cases where crypto investments have made people rich. However, it is essential to be fully aware of the risks of entering the crypto world.

For starters, there are a massive number of scams around Bitcoin and other cryptocurrencies, from replica or fake trading platforms to social media adverts for “get rich quick” schemes; it is essential to conduct proper research before investing.

Whilst their use of blockchain technology and other security features work towards making it difficult for criminals to hack digital currencies, it is not impossible. Historically there have been several large crypto hacks, as detailed in this article from shrimpy -Crypto Heist: Revisiting the Most Infamous Hacks in Crypto History.

The Financial Conduct Authority (FCA) has also previously issued warnings around cryptocurrencies, with concerns around the risks associated with investing in unregulated assets.

“Investing in cryptoassets, or investments and lending linked to them, generally involves taking very high risks with investors’ money. If consumers invest in these types of product, they should be prepared to lose all their money. “

FCA

The main worry around these currencies being unregulated is that users who feel they were wronged in some way or lose a substantial amount of money have no way of regaining that money; for example, they cannot complain to the financial ombudsman, and there is no compensation scheme, such as the Financial Services Compensation Scheme (FSCS). If something were to go wrong with a regular, protected bank account, the FSCS would repay any loss up to £85,000 per person/per bank.

Another considerable risk associated with cryptocurrencies is naturally the volatility of the market, prices can rise and fall in a matter of minutes, and there are a massive number of cases where a coin drops to less than 10% of the value they were the previous year.

“one Litecoin would have set you back more than $300 at the end of 2017 ($306.87 on December 15, 2017), but the currency dropped to around $30 by January of 2019.”

Forbes

This volatility, mixed with the enormous power and influence specific individuals hold over the value of coins, can undoubtedly make cryptocurrencies seem like a risky investment. But, there is always the case that all investments carry risks. The FSCS only protects most investments if the provider or firm goes out of business and not from poor investment decisions.

It’s safe to say that investing in cryptocurrencies come with a tremendous amount of risk. Still, the same can be said for those who invest in the stock market, open a stocks and shares ISA or realistically all investments. When thinking about investing money into cryptocurrencies, be prepared for the worst-case scenario.