A Totally Reasonable Explanation for Elon Musk Tanking Tesla’s Stock Price

As with everything, our most important economic lessons come from Bitcoin.
May 1, 2020, 7:45pm
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It's Friday, Tesla CEO Elon Musk is making a ton of reckless tweets, and the sun is out, so now seems like a good time to blog. I've got an argument for why Musk tweeting that Tesla's stock price is too high—theoretically an insane thing for a CEO to do, especially given that he's already been barred by the SEC from tweeting about Tesla stock without permission—is the least ludicrous thing he's tweeted today. It involves Bitcoin, because honestly we all died in 2012 and reality is now a Möbius strip of punishment.

After Musk's tweet, Tesla stock immediately fell by over 10 percent.

Two things first: One, Musk equating life-saving social distancing measures to fascism is ridiculous and irresponsible. Two, take for granted that Tesla investors, especially of the more casual Robinhood stock-picker variety, along with Tesla stans are losing it over Elon's tweet today. I would be too, if I'd overindexed on one stock that the CEO just tanked in the middle of an unhinged online fever dream. These are folks who believe in Musk not because of the original and beautiful Tesla dream of saving the planet, but because Tesla stock has a growth arc similar to Bitcoin.

Seriously, take a look:

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Price of Bitcoin. Image: Coindesk

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Tesla's stock price

I got the Bitcoin tracker from Coindesk, which does not go far enough back to track Bitcoin's price when it was under $100 in the early days, but these graphs have four notable, similar features: an early peak (for Bitcoin, this unfortunately starts where the graph shown starts, as Bitcoin hit its first major price peak as it got lots of attention in 2013 and 2014), a long trough, and later two peaks roughly 5-10x in size, followed by a shorter trough.

(This is where I'll just make the blanket note that Tesla is obviously a real company that makes real products that real people buy, and has done so for a long time; this fact, combined with the fact that its production numbers and earnings reports more directly affect its viability as a company than Bitcoin is seemingly affected by anything it itself does, has meant both that its stock price is more rooted in reality than Bitcoin's, and that its current boom cycle has been compressed into a very weird year of good corporate news, a global economic disaster, and erratic tweets. So while they're very disparate topics in a strictly economic sense, I'm not here to talk about The Economy, but instead trying to suss out Musk's need to post something seemingly so counterproductive.)

Tesla and Bitcoin aren't comparable in really any way other than one crucial thing related to their price: Tesla's stock value and Bitcoin's own value have both been dramatically influenced, not merely by the "market price" of the value they create, but by the psychology of both being assets that are highly recognizable, easily acquired, and (crucially) seemingly "obscure" enough that if you are in the know, you can get rich. More on that in a second. But to support this argument, take the fact that car company CEOs have perennially confused why Tesla is worth so much when it makes comparatively so few cars (isn't the market rational), and for Bitcoin, just take the fact that its price has never been rationally pegged to its utility as a currency alternative.

Instead, the prices of both are susceptible to the same hype cycle, based around four events in the lifecycle of a much-hyped, obscure tech investment that appeals to a certain type of investor looking for 10x gains.

First, the most important part is that each has clear “early adopter bubbles” that built fervent, rabid fanbases focused on the fact that they made a ton of money extremely quickly. Both of these bubbles then popped because there wasn’t actually enough fundamental utility/market success for either entity to sustain that initial bubble. Things settled down, but this initial bubble does two crucial things: First, it gives a proven narrative of an asset's ability to grow in value quickly, regardless of if that's rational or repeatable. Second, it creates a large fanbase of investors who have the stories to tell of their huge gains and every incentive to keep that narrative alive. Crucially, in the long term, these first bubbles look tiny now but they were huge growth at the time. That fact is all one needs to keep proselytizing.

That initial bubble is driven by people who genuinely are savvy investors in one way or another. They knew about something hot before other people did, and were enough in the scene to understand what they were buying. They're not going to be hurting too bad when the stock/Bitcoin prices correct themselves, which is why we have a long trough to follow.

Sure, everyone got excited there for a minute, but let's be real: both Bitcoin and Tesla weren't ready to sustain that level of expectation. So you've got a few years of growth for the company/cryptocurrency that irons out a ton of fundamentals; Bitcoin got easier to use, Tesla started making and selling a whole lot of nice cars. They were, for sake of me being concise here, succeeding at their functional goal in ways they weren't during their first bubble.

This is a good thing, so why wouldn't this success drive their prices higher? Well, lack of attention is one thing; negative attention and skepticism following a burst bubble is another. But most likely this is actually when both were priced correctly. You see some slow, steady growth commensurate with the successes of both entities, which is what you'd expect since the fundamental output of each requires them to grow more linearly than the pure exponential-growth tech entities they were viewed as by investors in their first bubble.

As both Tesla and Bitcoin improved their fundamentals, they both had savvy, highly-vocal fanbases of investors who a) had prior wins in the first bubble to prove their bonafides and b) every reason to point at each success and say "see, trust us, this thing is gonna go to the moon again."

(It's notable that both Bitcoin and Tesla have huge, very vocal fanbases built around subreddits, forums, and blogs focused largely on their investments' success. Every company has a fanbase somewhere, but Ford forum posters aren't talking over and over about when their investments are going to pay off. They're talking about Mustangs.)

I would not be surprised that in a moment of clarity, he decided to tank the stock because high prices and high expectations from stans were setting him up for more long term scrutiny than him being in trouble with the SEC short term

Eventually, all of that success-as-a-useful-product growth and here-comes-another-boom talk sustains a significantly bigger growth, driven by the fact that a) there is the fervent fanbase from the first explosion, b) years of those people pointing to “just trust us, it’s ready to blow!“, and c) the price-accelerating psychological effect of hitting new price peaks after years of dormant growth. No one wants to miss out on a sure bet, especially in the hallowed 10x world of highly-publicized tech investments, so this next peak is HUGE, helping sustain the myth.

This peak is unsustainable too, but unlike that very first bubble long ago, this peak is built on a foundation of stress. It's not propped up by a bunch of investors who understand a good roughly well enough to take a flyer on it, like every early Bitcoin person did, but on the mere idea that a stock has to go up, because everyone is talking about it! I mean, really, I have absolutely no idea what's actually going on in Tesla factories. Are they doing a good job or not? Who knows! Big-time institutional investors would, but I have no idea. Ultimately though, that's irrelevant, because I'm not buying a potential fast-growth stock like Tesla based on whether the price is based in reality, I'm buying it based on whether I think I can get rich as shit really quickly! And for that, investors only need the IDEA that it can go up, and buy-in from other bandwagon investors who are also buying in.

You know the story by now: everything comes crashing back to Earth, but rather than the initial small, fervent, obsessive fanbase, now you have a whole bunch of NEW folks who saw the potential to get 10x as rich in half the time in a significantly more mature market (which is impossible), and so they all lose their goddamn shit through the next trough, and all this attention (and smart narrative building by Tesla) accelerates into a second peak.

In the case of Bitcoin, the price stabilized somewhere around half its peaks as a bunch of people lost their money and exited, and others held on figuring they could afford to wait for more growth. And all along the original grifters got paid, but the folks who lost by buying too late on the first and second peaks lost their minds (and wallets). In the end, the Bitcoin system has been so perennially bogged down by boom and bust cycles, with many power players moving in and out over the years, that it's moved into a world a whole lot different than its original promise.

Musk is fully steeped in the VC-to-forum-poster hype cycle outlined above, so I have to believe he knows that eventually valuations can get so high—not based on actual product success but on the psychology of wannabe exponential growth investors—that shareholder demands end up steering the company more than he’d like, especially since he takes obsessive control over the company's image, operations, and stock price.

So I would not be surprised that in a moment of clarity, he decided to tank the stock because high prices and high expectations from stans were setting him up for more long term scrutiny than him being in trouble with the SEC short term. And maybe then the Tesla price stabilizes again with lower expectations as he continues to try to build a profitable car company in the midst of a global economic collapse, which is hard enough without a bunch of Bless You Stonks God reply guys and r/WallStreetBets bros battering your mentions for months by begging you to save them from economic ruin by doubling their Tesla investment in the next three weeks.

Hey, it worked for Bitcoin, more or less, but instead of a master plan by one guy it collapsed because Bitcoin people are insufferable con artists.