Crypto Update

Crypto Crash Isn’t Elon Musk’s Fault

Crypto Crash Isn’t Elon Musk’s Fault

One of these days, we’ll dig into my complicated feelings about Elon Musk. They were complicated before Tesla bought bitcoin, started accepting bitcoin as a payment method, stopped accepting bitcoin as a payment method and Musk hopped aboard the crazy dogecoin train. (Say it with me everyone, dogecoin is a joke.)

But the truth is human beings influence markets. They always have. We buy diamond rings to declare our love because of a giant influencer campaign. Legendary entrepreneur and investor Peter Thiel has shaped the minds and decisions of an entire generation of angel investors, venture capitalists and startup founders. And Warren Buffett still has the ability to move markets with a single utterance.

So as mad as you might be at Elon Musk about this week’s crypto flash crash, stop blaming him for the crypto markets tanking. Musk wasn’t solely responsible for bitcoin cracking the $64,000 mark and setting a new record high. And he isn’t solely responsible for the fact that BTC fell nearly 30% on Wednesday to around $30,000. Ethereum fell more than 20% on Wednesday as well, with no input from Musk at all. As I write this, bitcoin is trading at around $40,000 and ethereum is trading at around $2700.

And while you’re at it, stop blaming China too (as tempting as that is). China’s decision to ban banks from processing crypto transactions contributed to crypto’s slide. But much like Musk, it likely wasn’t the proximal cause. 

China has been cracking down on crypto for years. And this year, China launched its own digital currency. People that are shocked that China moved to restrict crypto transactions are probably the same people that were shocked there was gambling in Casablanca.

So what caused the crypto flash crash? The most likely explanation has two parts.

  • People wanted to sell. Crypto investors made a lot of money over the last 12 months. There were a lot of people just itching to sell. Musk and China provided a good excuse.
  • Less than 2% of the world owns crypto. That means 98% of the world has no crypto exposure. When you think about it in those terms, the market’s volatility makes sense. It’s easier to generate excitement in a smaller market. And it’s easier to create panic.

The sheer volume of people selling recently (because they wanted to sell!) created an avalanche effect. The market crashed. And now we’re all wondering what’s going to happen next.

Institutional investors moving into bitcoin helped sparked this bull run. And to a large degree, institutional investors will determine what happens over the next 12 months.

This is the first time many institutional investors have experienced the full volatility of the crypto markets. If they panic, we’ll see more sell offs. If they decide they’re in this for the long haul, we’ll see the markets stabilize.

I think the markets settling down for a little while is the most likely outcome. Institutional investors tend to invest for the long haul. Their instinct is to buy and hold. So they’ll likely ride this out.

At a minimum, they’ll want to protect their investment. That establishes a solid price floor for bitcoin (depending on where institutional investors bought in). It also continues bitcoin’s basic behavior pattern of setting higher highs and higher lows. But as I’ve said many times, timing the crypto markets is a fool’s errand.

Here’s what I wrote last week

Investors that are looking to hold ETH for less than two years should probably avoid buying at or near the top of this market. The risk isn’t worth the reward.

That was actually solid advice for the entire crypto market. And it holds true today. Don’t buy into this market with the expectation of turning a quick profit.

If you’re planning on buying and holding for a few years, then buying this dip could make sense. Remember bitcoin’s history — higher highs and higher lows. That means bitcoin is likely to rise above $64,000 in the future — making today’s price around $40,000 a relative bargain. We just don’t know the exact timing.

And as always, don’t invest money in crypto that you can’t afford to lose. Crypto is a young, immature asset class that carries a great deal of risk with it. If you’re willing to tolerate the risk, the rewards could be enormous. But the risk is definitely real.

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