In this article, we are going to explore Elon Musk’s recent announcement that he wants to make a bid for Twitter. It’s no secret that Twitter is a vital social network for the cryptocurrency community. Nevertheless, Musk’s ambitions to buy Twitter are purportedly to ensure Twitter represents “an inclusive arena for free speech”. It’s unclear exactly what Musk intends to do with this. While some have expressed hope that Musk might be intending to decentralize Twitter, breaking down the traditional corporate structures that currently underpin it, it remains to be seen if this bid will even come to pass. In this article, we’ll look at some of the reasons Musk is offering to buy all of Twitter’s shares. In addition, we’ll define and explore the “Musk effect”, .
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Elon Musk’s Twitter Investment – Background
Let’s start with a bit of backstory to preface the past few week’s Twitter drama. On April 4th, 2022, the world’s richest man and serial entrepreneur, Elon Musk, announced he had made a substantial investment in Twitter. In fact, this investment – corresponding to roughly 9.2% of Twitter’s outstanding shares – briefly made Musk the largest shareholder. It initially seemed that Musk would go on to become a board member of Twitter following this investment. Nevertheless, it subsequently emerged that joining Twitter’s board would limit Musk to owning less than 15% of the company’s shares. In response to this, Musk instead announced he would not be joining Twitter’s board – rather, he announced he’d push for change at Twitter as an activist investor. Following this, Musk went on to suggest that he now wanted to buy all of Twitter’s shares and take the company private.
Both outlets within mainstream media as well as within the cryptocurrency community reacted strongly to Musk’s offer to buy Twitter. Within a few hours of tweeting his offer to the Securities and Exchange Commission, Musk was interviewed at a TED Talk. The interviewer allowed Musk to share some thoughts and motivations behind the Twitter bid. We will discuss the interview in further detail later on. Musk is famously a polarizing figure who has an uneasy relationship with the media, as well as within crypto circles.
Historic Tweets by Musk
Most within the crypto community associate Elon Musk’s behavior on Twitter with meme tweets promoting cryptocurrencies such as Dogecoin or Bitcoin. This has in some instances introduced the broader public to cryptocurrencies, with the so-called “Musk effect”, which we will explore later. When Musk included #Bitcoin in his Twitter bio in January 2021, Bitcoin rose from around $32,000 to over $38,000 in a few hours. Musk has a fraught history on Twitter even beyond merely the crypto industry. For example, Musk’s iconic tweet “considering taking Tesla private at $420” resulted in a fraud charge and a $40 million penalty from the SEC. This has all raised questions surrounding social media influencers and where the limits of free speech should be drawn.
Elon Musk’s Twitter Proposals
In his TED Talk interview hours after placing an offer for Twitter, Elon Musk said he views Twitter as the “de facto town square” in a digital world. Pointing to his passion for Twitter, Musk also argued he didn’t make his bid on Twitter out of financial motivation. Provided the right modifications and adjustments to its fundamental business model and algorithm, Musk argues, Twitter could become the globally leading go-to place for digital conversations. According to Musk, this would start with three critical adjustments.
First, Musk self-identifies as a “free speech absolutist” and will do what he can to enforce this. In short, Musk wants people to be able to disagree with each other, converse, learn, and discuss creatively within the bounds of the law. For example, only if tweets appear to be inciting violence or are apparent hate speech could Twitter remove content.
Second, Musk wishes to improve the transparency of the Twitter algorithm and content moderation parameters. As such, Musk says he hopes to open-source the algorithm for developers worldwide to adjust and innovate accordingly. Plus, transparency would improve why some tweets receive promotion or demotion over others.
Another adjustment high on the list of priorities for Musk is content moderation. Further, this includes saying “bye-bye” to Twitter bots! Musk openly declares his disfavor towards fake accounts and Twitter bots across all media platforms. As a result, he has stated on numerous occasions his intent for removing Twitter bots to improve the user experience.
The “Musk Effect”
Musk does not draw any links between his Twitter bid and his penchant for cryptocurrencies and e.g. decentralized organizations. However, it can be valuable to look at what effect Musk’s tweeting has historically had on cryptocurrencies. Blockchain Research Lab, a company based in Hamburg, Germany, set out to quantify the size of any effect that Musk’s tweets had on the market – or, in short, “the Musk effect“.
Using algorithmic, manual, and media analysis data collection, researchers’ collated 67 of Musk’s cryptocurrency-related tweets. Assets mentioned includes Dogecoin (66%), Bitcoin (30%) and/or Ethereum (1.5%), or cryptocurrency in general (2.5%). With 50 events identified, some were removed from the sample analysis for being too generalized. Therefore, with 47 asset-specific tweet events in the sample, Blockchain Research Lab could more accurately analyze any influence Musk has had on the crypto markets. Accordingly, the price performance of assets via a Binance API was measured between 361 minutes before and 120 minutes after each event.
The results show a price increase across all events; however, the nature of the reactions between assets differ. For example, after Musk tweets about Bitcoin, the price displays a small spike. It continues with a gradual increase for an average of 45 minutes before leveling off. Conversely, a Dogecoin tweet “…immediately reacts with an abnormal return of 2.16%, followed by another 2.16% in the next minute. After minute three (0.79%), the effects are no longer significant”. There are a few potential reasons for this. It appears Musk usually tweets about Bitcoin during falling prices.
On the other hand, Dogecoin-based tweets are more often made when the asset is already up 2% or more. Moreover, analysis of the sentiment of tweets shows differences in moods between assets. Dogecoin tweets are nearly all positive, whereas Bitcoin tweets are more “of mixed tone”.
What Does This Mean for the Crypto Industry?
When the world’s richest man attempts to buy a social media force such as Twitter, naturally, questions start arising. Moreover, a proven “Musk effect” on the free cryptocurrency market raises some crypto community fears that the Twitter investment could allow Musk to manipulate the crypto market. Although this seems to be far from Musk’s intention, it can be valuable to understand the two schools of thought analyzing the impact of Elon Musk investing in, or owning, Twitter. These are the efficient market hypothesis (EMH) and adaptive markets hypothesis (AMH).
The efficient market hypothesis (EMH) model denotes that prices in a free market reflect all the information available. Namely, the supply and demand of an asset equilibrium satisfy consumers and producers, such as Bitcoin investors and Bitcoin miners. Further, as new information emerges, the shape of the curve shifts. In the context of Elon Musk, Twitter, and the crypto markets, the EMH model would automatically price in any new information. Peer-reviewed research has cast doubt over the validity of the EMH model, predominantly using market behavior in its calculations.
On the other hand, the adaptive markets hypothesis (AMH) operates as an expansion of the efficient market hypothesis (EMH) model. Fundamentally, AMH dictates the degree of accuracy in which available information influences an asset price is context-dependent. For example, market participant characteristics and environmental conditions. In the context of cryptocurrency, the Musk effect on the market calculation would be inclusive of external market conditions. This includes an asset’s price performance history or regulatory uncertainties.
Ultimately, it is down to consumers’ individual decisions about whether or not to comply or disregard an influencer’s statement or suggestion. Nevertheless, the ethics and responsibilities of individuals who find themselves in an influential position are a subject of serious debate in the crypto communities.
Elon Musk Won’t Join Twitter’s Board of Directors
Following Elon Musk’s initial investment of roughly 9.2% in Twitter stock, the entrepreneur was offered a seat on the board of directors. However, this move prevents Musk (and any other director) from owning over 14.9% of the company. After initially saying yes to the board set, Musk soon retracted his offer. In response, Twitter CEO Parag Agrawal tweeted:
“We have and will always value input from our shareholders whether they are on our Board or not. Elon is our biggest shareholder and we will remain open to his input”.Parag Agrawal
A few days later, following a Securities and Exchange Commission (SEC) filing, Musk submitted an offer to buy the entirety of Twitter. On April 14th, 2022, at the time of the offer, Twitter’s stock price was just over $45. Musk offered $54.20 a share, or $43 billion for a company with a $37 billion market cap. This offer effectively constitutes a a 38% markup. The offer from Musk was rejected by the board of directors, initiating a strategic “poison pill” plan preventing Musk from taking sole ownership.
In short, this poison pill introduces a new shareholder’s rights plan. Essentially, anyone who attempts to purchase 15% or more of Twitter stock without the board’s approval will trigger an alternative investment plan. This will allow certain existing shareholders the liberty of purchasing extra Twitter stock at a discounted rate. As a result, this plan aims to eliminate the possibility of Musk, or any other sole individual, taking full ownership.
Social Media Influencers and Cryptocurrency Markets
The traditional capitalist economic model operates using a free-market model with prices fluctuating to meet the supply and demand equilibrium. However, traditional markets are vulnerable to manipulation, and stock prices can rise due to outside factors. Nevertheless, market manipulation historically prevents healthy “boom and bust” cycles of economic growth. Conversely, the cryptocurrency market is a free market with cryptographically secure parameters that prevent or heavily penalize bad actors in a network.
Blockchain Research Lab say Musk’s tweets showcase “a conflict between the ideals of freedom of speech, morals and investor protection”. However, further research in this area suggests that “lower previous cryptocurrency-related activity drives effects on cryptocurrencies”. For example, if it became a regular everyday frequent occurrence for Elon Musk to tweet about cryptocurrencies, it would likely have less impact on the market. Market participants would likely be less interested or reactive the more common it becomes.
Nevertheless, the social psychological phenomenon of transference is a tactic historically used throughout the advertising industry. This theory describes how attitudes, characteristics, and behavior of influential figures are thought to be transferable through advertised assets. Accordingly, most social media influencers earn a living through marketing affiliated products. However, boundaries are unclear surrounding the impact of an influencer’s own opinion. For high-profile individuals, mentioning a product or brand may result in market fluctuations without any active intent, knowledge, or affiliation. Moreover, as compliance and regulations surrounding cryptocurrencies are still irresolute, the regulatory field of influencers and crypto is a challenging paradigm to navigate.
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Elon Musk Twitter Investment – Summary
At the beginning of April, Elon Musk stunned the world by announcing an investment in Twitter stock. At the time, he became the largest shareholder. Musk went on to make a filing with the SEC, announcing his intent to buy all of Twitter. However, this was met with strong resistance from Twitter’s board of directors. Shortly after the offer, Twitter began implementing a “poison pill” plan to prevent Musk from taking sole ownership. Further, Musk is no longer Twitter’s leading shareholder.
Nevertheless, in a TED Talk interview following Musk’s Twitter offer announcement, Musk admitted to having a “plan B” should the board of directors not take him up on the offer. However, he didn’t give away any further details. Elon Musk says he wants to improve the Twitter platform and enhance the user experience. This would include parameters for free speech, open-sourcing the algorithm, and eliminating circulating Twitter bots. However, this would seemingly not go as far as to “make Twitter decentralized”. Despite the good intentions, one of the biggest business deals of the year has sparked much controversy surrounding free markets, free speech, and investor safety. What are your thoughts on Elon Musk investing in Twitter?
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