Impact of Musk's remarks on volatility of Bitcoin and Dogecoin amid COVID-19 pandemic

Abstract

The sudden volatility in cryptocurrency prices, especially Dogecoin and Bitcoin, owed to Elon Musk's public statements during COVID-19 has triggered a debate to study the impact of Musk’s endorsement on cryptocurrencies and examine the hedging capabilities and leverage effect on cryptocurrencies during uncertainties. Observation of the market capitalization of Bitcoin and Dogecoin shows that the price of these cryptocurrencies is disturbed due to positive and negative comments by Musk and other public icons. Therefore, these cryptocurrencies are often looked at with suspicion by participants in the cryptocurrency market. This research aims to analyze the impact of favorable and unfavorable Musk’s remarks on Bitcoin and Dogecoin and further examine the hedging capabilities and leverage effect of Dogecoin and Bitcoin against stocks, gold, Treasury yields, the Euro, and the Pound exchange rate, particularly during the COVID-19 pandemic. The research collects daily observations from Jan 2018 to Dec 2022 from Yahoo Finance, yielding 1226 observations, and uses statistical tests to analyze the significance of Musk's tweets on cryptocurrencies. Further, this research applies the GARCH model to understand the impact of Musk's remarks on the hedging capabilities and leverage effect on Dogecoin and Bitcoin during COVID-19. The findings indicate that Musk's comments had no lasting impact on cryptocurrency prices. However, his unfavorable remarks significantly affected Bitcoin's and Dogecoin's hedging capabilities during the pandemic. The study also revealed a pronounced leverage effect in Dogecoin, contrasting with a moderate impact on Bitcoin. Dogecoin strongly responded to positive news or Musk’s favorable tweets, while Musk’s unfavorable tweets influenced Bitcoin's leverage effect. The study suggested the importance of information in the cryptocurrency market. The study also focused on the significance of long-term perspectives and correlations between traditional assets like stocks and cryptocurrency yields, which can be instrumental in guiding investment decisions and aiding in risk management during uncertainties.