In a new low for crypto Dogecoin drops 30% over an episode of a comedy show. What does and doesn't move prices for crypto?
Recently, Elon Musk hosted Saturday Night Live (SNL), and due to what was said by Musk on the show made the price of Dogecoin, a cryptocurrency, fall by almost 30%. I haven’t seen the show so I don’t know exactly what was said, but it certainly seems absurd that a comedy show had the power to collapse the price of a cryptocurrency. I’ve been rather harsh on cryptocurrencies in the past, if you’re interested in reading my previous posts on crypto you can find those here, which some might argue is ignorance on my part. However, I do know something about economics and finance, and SNL seems like a textbook example of noise, and thus shouldn’t have an effect on Dogecoin’s price.
In financial economics one key concept is the distinction between ‘noise’ and ‘material information’, a distinction which doesn’t seem to apply for Dogecoin. Broadly, material information is any information which is directly relates to a firm’s business and which has the potential to change the value of a security. Noise is any information which is at most tangentially relevant to a security and should not, if all investors are rational, affect the price of a security.
I’ve argued before that cryptocurrencies don’t have any fundamentals; a currency not backed by a government or a commodity has no inherent value. The question then, is what constitutes material information for a security with no fundamentals? The Dogecoin investors have apparently decided that comedy television changes the value proposition of owning a ‘currency’, which begs the question: if we accept that an episode of SNL is material information what isn’t?
To me, this debacle clearly illustrates the risks of owning cryptocurrencies. Crypto is already notoriously volatile, if something as inconsequential as a cryptocurrency featuring on a comedy show drives prices the volatility increases exponentially. Crypto offers quick wins but also enormous risk. The more I learn about cryptocurrencies, the less I understand and the less I like it. It could be that I’m too conservative for crypto, but the fact that it doesn’t seem to comply with what economic and financial theories suggest it should behave worries me.
Whether or not you should invest in crypto is a decision for you to make, my point is only to highlight the erratic and, at least to me, illogical ways prices move.
If you liked this post you can read my last post about inflation and state capture here, or the rest of my writings on cryptocurrency here. It'd mean a lot to me if you recommended the blog to a friend or coworker. Check back next Monday for a new post!
Written by Karl Johansson
Cover Photo by Alesia Kozik from Pexels, edited by Karl Johansson
Comments