Musk’s appearance on the US’ popular comedy television show had driven up the price of Dogecoin – a cryptocurrency that was created as a joke in 2013 – as much as 800 per cent in the past month. Cryptocurrency investors expected their ‘Father Musk’ to talk up Dogecoin, as he has done on numerous occasions on Twitter throughout 2021.
His comments that ‘dogecoin is the people’s currency’ and other similar feigned remarks about the ‘meme’ crypto, portrayed with the symbol of dog breed Shiba Inu, has helped the cryptocurrency become the fourth largest. Prior to the Sunday’s collapse, the cryptocurrency’s market capitalisation was greater than that of India’s second-largest IT company Infosys.
Musk’s comments betrayed what many in the world of finance believed the dogecoin rally was symbolising – that the movement was merely an insincere joke on the failure of the current monetary system.
Dogecoin has plummeted over 50 per cent since Musk’s comments as disenchanted investors rushed to the exit to protect whatever windfall they had made over the past three months.
The episode sheds a critical light on the role that social media plays in magnifying herd behaviour in financial markets. Dogecoin, ultimately, has no uniqueness. It has unlimited supply, which makes it an unattractive store of value compared with Bitcoin, the first-ever cryptocurrency.
Dogecoin’s founder Billy Markus himself could not comprehend the meteoric rise of the joke he had created to get back against a tweet someone had made about the ‘next big thing’ in cryptocurrencies. He sold his coins to purchase a second-hand Honda in 2015.
Doegcoin’s rally was simply a function of what happens when a crowd of people believes in something even if that something may appear bizarre to those not standing in the crowd.
“Today’s social media tools have far greater reach, scale and anonymity than previous technologies. This raises a potential issue: the possibility that wrongdoers will attempt to use these powerful forums to hype certain stocks or manipulate markets,” Gary Gansler, the new commissioner of the Securities Exchange Commission, told the US Congress recently.
Gansler’s comments come on the back of the ‘meme’ stock phenomenon on Wall Street that saw a bunch of traders, who were part of a Reddit community, take on a multi-billion dollar hedge fund by short-squeezing them out of positions in stocks like GameStop.
Dogecoin is a child of a similar movement.
In the world of investing, being part of the popular or following successful investors is common. Just ask the blind worshippers of Warren Buffett and Rakesh Jhunjhunwala. Herding is as old to stock markets as water is to Earth. It is generally accepted that herding or buying stock for popularity’s sake is not sound investing judgement and yet it is as common as crowding in a Mumbai local.
Musk’s persona of being a futurist and his credible track record of being part of some of the most successful innovations of the recent past made many of his fans and followers believe that he saw something in Dogecoin that others did not. A classic case of following the money, just this time those were only words.
Or was he literally ‘drinking the Kool-Aid’, an expression that refers to a person who believes in a possibly doomed or dangerous idea because of perceived potential high rewards?
To be fair to Musk, he never once asked investors to buy Dogecoin. His own company, Tesla, invested $1.5 billion only in Bitcoins, not Dogecoin. Yet, it will be foolish to suggest that Musk was unaware of the effect his words could have on his followers.
The ‘Technoking of Tesla’ chose his biggest night under the spotlight to puncture the hopes of Dogecoin owners. Ironically, millions of Dogecoin owners were spotted with Doge’s expression plastered all over their faces.