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TLDR below. This is not financial advice.
Introduction
This is a guest post by Dr Viroshan Naicker. With a focus on mathematics and graph theory, Dr Naicker brings in his insight into how nodes interact, similar to how powerful nodes like Elon Musk affects interactions between nodes and edges in a network.
Elon Musk has always evoked public interest (as billionaire genius types tend to do). The ongoing story this year, for better or worse, has been in the crypto space, where people have taken their cues from his views.
Earlier this year Tesla caused waves when they published their balance sheet and announced to the world that they had 1.5 billion dollars worth of Bitcoin (BTC) listed as an asset. More recently, Musk's comments have prompted crypto sales that have seen the price of Bitcoin tumble from above $60,000 into the $30,000-$40,000 range. Overall, the collective crypto market cap fell by just over a trillion dollars over May.
Musk and Market
So why does Elon seem to have this power to influence the world of crypto?
First, let's talk about money in all its forms: fiat and crypto. Arguably, money is a type of social power storage, like a battery. We use it to temporarily store our power to engage others (on our projects and for our whims), and when we pay for a good or a service, we draw on that power. In a similar vein to electricity, it is a consumable resource and is transferred as it is used.
After that, the question is which money (or battery) to use? History shows that an implicit contract exists between society and the choice of money system: At various points in world history, including Weimar, Venezuela, and Zimbabwe, nation state-backed fiat systems have broken down because economic agents broke this contract.
Elon Musk, in this context, has a good amount of stored social power (money). This social power he harnesses can move markets, as we see below.
Market and Money
This points to monetary systems as a type of database that accounts for social power, but only if we agree to use that database. In this vein, a token system is a medium for value storage (and possibly utility storage) for a network of users that choose to adopt that system using a social contract. If the database is corrupt, why would you use it?
Less dramatic than the collapse of a national currency is the assignment of social power to crypto assets. Over a decade, a social contract has developed between crypto and a user network, along with bridges between crypto tokens and fiat tokens as valid stores of value. Remember the guy who paid 10,000BTC for two pizzas in 2010? That was the start of a social contract that turned BTC into a form of social power storage.
The beauty of crypto is that we are now moving from a type of general-purpose money backed by states to a system of fit-for-purpose tokens that do weird and wonderful things. However, the network effects on cryptocurrencies are more pronounced and subject to social whimsy.
Musk and Money
Elon’s whims can either endorse the implicit contract between BTC and other forms of storing social power (Dogecoin) or they can repudiate this contract. Earlier this year, the decision to add BTC to the balance sheets of Tesla acted as an endorsement of value. And so, on cue, people bought more BTC.
Now Elon is tweeting the other way, and Tesla has decided not to accept BTC as a form of payment for its vehicles. The good news is that while toddlers stumble more than adults, eventually, we all learn to walk.
Bitcoin, the new money
The difference between crypto and fiat is simple. We are privatising money. Thus, the risk to governments everywhere is that society decouples (at least partially) from the default, nation-state fiat store of value because there are valid alternatives. Is it good or bad? You decide.
TLDR:
We have seen a lot of KOLs memes about cryptocurrencies and how that has affected the price. Especially with Elon Musk, one of the most famous people on the planet has also had coin meme actions like talking about Dogecoin and Bitcoin. His Tweets have greatly influenced the price of the above cryptocurrencies and the market as a whole.
We are not talking about good or bad here, but for the main market, but something like this can be a good signal for people to know more about crypto space. But on the contrary, it also brings risks when people consider the coin meme as an action to invest in. We need to be careful, have our own analysis to be wise in a market like this.
Ps: Order the textbook "Economics and Math of Token Engineering and DeFi" today!