Why this UAE investor ignores Elon Musk’s 'whipsawing' tweets when he trades in cryptocurrencies

For the past four months, Dubai resident Shashwat Phumbhra, a 28-year-old Indian equity analyst and trader, has been investing in Dogecoin but says his investment in the cryptocurrency does not depend on Tesla chief executive Elon Musk’s tweets.

"If one is making investment decisions on the basis of a billionaire's tweet, there is a problem with the investor," he tells The National. However, he is a big fan of Mr Musk and Tesla shares make up a big portion of his investment portfolio.

Mr Phumbhra first bought Dogecoin when it was priced between $0.05 and $0.07 and it multiplied in value. He added more Dogecoin to his portfolio when it was trading at $0.25 and $0.3. He later exited his holding when the parody cryptocurrency was valued at between $0.4 and $0.6. Although he has booked a tidy profit, he declined to say how much he invested.

Dogecoin is a cryptocurrency that was created in 2013 as a joke by engineers Billy Markus and Jackson Palmer. The term Dogecoin was borrowed from a popular Doge meme at the time featuring the Japanese Shiba Inu dog.

Cryptocurrency investors have been rocked in recent weeks as environmental concerns over mining, regulatory scrutiny, warnings by Chinese authorities about digital currency payments and a flurry of erratic tweets by billionaire Tesla chief executive Elon Musk whipsawed prices.

Pressure on Bitcoin, in particular, intensified after Mr Musk reversed his stance on Tesla accepting Bitcoin as a mode of payment for its electric vehicles.

About 17 per cent of investors who have bought cryptocurrencies "fully understand" their value and potential, while 33.5 per cent of buyers have either zero knowledge about the digital assets or would define their level of understanding as "emerging", according to the findings of a survey by market research company Cardify in March this year.

“In the crypto world, things don’t always move because there is reason behind it. It moves if there are enough people behind it,” says Mr Phumbhra, who never invests money he can't afford to lose into memecoins because of their speculative nature.

Aside from Dogecoin, Mr Phumbhra has also invested in other altcoins such as Ethereum, Litecoin, Binance coin and some Eos. He trades in cryptocurrencies on platforms such as Interactive Brokers, CMC and IG.

“If you don’t know too much about cryptos, stick to the visible, large coins. Don’t put [in] a large chunk of money which you are afraid to lose,” he says.

Although Mr Phumbhra believes a small allocation in cryptocurrencies can provide outsized returns over the course of time, he warns novice investors that these digital tokens can crash by 20 to 30 per cent overnight, driven by Mr Musk’s tweets or a government’s announcement.

After hitting a record high of $64,800 in mid-April, Bitcoin fell by 53 per cent to an almost three-month low of about $30,066 on May 19. It has since regained some ground and, at the time of writing, is trading at $35,851, according to Coinmarketcap.com. Ethereum, meanwhile, fell to $1,850 on May 19 – the largest single-day loss for the crypto since March 2020 – and currently trades at $2,428. Dogecoin touched an all-time high of $0.75 on May 7 after Mr Musk tweeted a promotional image for his Saturday Night Live appearance, which was photoshopped to include an image of the Shiba Inu dog. It currently trades at $0.3067.

That’s the nature of cryptocurrencies. If that scares you, then do not put money behind them, Mr Phumbhra says.

The Central Bank of the UAE has previously issued guidance on cryptocurrencies, saying that it is not “presently accepting [or acknowledging] crypto assets or virtual assets as legal tender in the UAE”. In December, the regulator said: “The only legal tender in the UAE is the UAE dirham.”

Warren Buffett, the chairman of Berkshire Hathaway, has been critical of Bitcoin. “I don't have any Bitcoin. I don't own any cryptocurrency, I never will,” the multibillionaire investor said last year.

Meanwhile, US Federal Reserve chairman Jerome Powell says cryptocurrencies are vehicles for speculation that are largely used for making bets on price increases and haven’t reached the status of payment mechanism. His counterpart at the Bank of England, Andrew Bailey, agrees, saying that cryptocurrencies and similar assets are a danger to the public.

Bitcoin is not a reliable hedge for risk-off events, let alone inflation shocks, according to New York University economist Nouriel Roubini. Bitcoin and other cryptocurrencies have no income or utility, so there’s just no way to arrive at a fundamental value, he adds.

A Bank of America Fund Manager survey in April found that about 74 per cent of professional investors view Bitcoin as a bubble. Fund managers also rated Bitcoin second on the list of the most-crowded trades, trailing technology stocks.

As Mr Musk continues to throw his support behind Dogecoin, he maintains an absurd inconsistency that severely undermines his credibility in criticising Bitcoin, says Alex Adelman, chief executive and co-founder of Lolli, a Bitcoin rewards application that allows people to earn and own Bitcoin when they shop online.

“Doge is identical to Bitcoin in that both use proof of work – the energy-intensive mining process to create new Bitcoin,” Mr Adelman says.

“We’re watching a long-game PR play by the Tesla chief executive to either buy Bitcoin at a discount [as the company was profitable largely due to Bitcoin last quarter] or make an entry into the US renewable fuel credit market.”

Meanwhile, smaller cryptocurrencies are more prone to “pump and dump” schemes, potentially making them riskier to trade, says Fawad Razaqzada, a market analyst at broker Think Markets. Wider spreads and lower liquidity also make them riskier, he adds.

“As with all crypto, the risks are high, and these are magnified if you step away from the big names,” according to Laith Khalaf, an analyst at investment platform AJ Bell. “All cryptocurrencies face uncertainties regarding their long-term adoption by businesses and consumers, and that is heightened for smaller, lesser known ones.”

Indian finance manager Taher Merchant, also a resident of Dubai, fully understands these risks and does not leverage his trades by using borrowed money when buying memecoins and altcoins. He only invests small amounts in the range of $1,000.

"When I first invested $1,000 in Dogecoin in February 2021, it was only worth $0.05. It tripled in value, so I was left with $3,000. Then I invested $4,000 when Dogecoin was at $0.20. I exited my position and re-invested when Dogecoin was at $0.45. It had reached $0.72 at one point. I exited at around $0.65," Mr Merchant, 32, tells The National.

He made an overall profit of $11,000 on Dogecoin. “Small cryptos tend to appreciate in value more. If you have a $1,000 position in a small crypto that is picking up, it might double in value quickly,” he says.

Mr Merchant also invested $2,000 in Bitcoin when the cryptocurrency was valued at $8,000. He exited the position when Bitcoin increased to $10,000. Similarly, he invested in Ethereum, the second-biggest cryptocurrency, when it was valued at $2,000. Now, the digital token is worth $2,700.

“I always seek out cryptos that can become the next Bitcoin. For instance, Cardano, which is worth $1.6 now,” he says.

The UAE resident warns amateurs not to  leverage their cryptocurrency trades by borrowing. You should only invest money in cryptos if it is sitting idle or “if you are willing to hold it for a year because of the volatility”, Mr Merchant adds.

Mr Merchant intends to keep the altcoins in his cryptocurrency wallet until they go mainstream.

“Elon Musk's decision to enter the crypto industry validated my decision to invest in the asset class,” says Mr Merchant, who has allocated between 10 and 20 per cent of his portfolio to digital tokens. “If I lose it, it wouldn’t affect me,” he adds.

Investors’ portfolio allocation to cryptocurrencies should depend on their risk appetite, market experts say.

“Risk lovers may wish to allocate a larger portion of their portfolio to cryptos, while the more conservative traders may keep it small. In any case, I reckon it should be single digits given how volatile cryptos can be,” Mr Razaqzada says.

Investors can have a very small exposure to cryptocurrencies, but it should be an amount they are willing to lose in its entirety in a worst-case scenario, Mr Khalaf says.

“Crypto has no fundamentals on which to hang a valuation, all holders can do is speculate on whether they might be widely circulated in future, which would increase their value,” Mr Khalaf says. “Clearly the fact that cryptocurrency prices can be affected so significantly by something as extraneous as Mr Musk’s Twitter feed speaks as to the risks inherent in these assets.”

Because cryptocurrencies are driven predominantly by speculation and sentiment, it will be “almost a crime to ignore” what Mr Musk says since he has the ability to move the market sharply, Mr Razaqzada says.

With no regulations governing cryptocurrencies, instances of fraud on market exchanges are increasingly common, experts say.

Globally, major cryptocurrency thefts, hacks, and frauds totalled $432 million as of the end of April, according to a report by crypto intelligence company CipherTrace. About 56 per cent of that, or $240m, was related to decentralised finance.

In 2020, total losses in the cryptocurrency sector through fraud and crime were worth $1.9 billion. In 2019, cryptocurrency crime losses hit a record $4.5bn, according to CipherTrace.

“Investors need to be confident that the exchanges are well-established and safe from cyber attacks, especially when depositing large sums of money,” Mr Razaqzada warns.

“As well as reading online reviews, they should call and speak with representatives of the exchanges to see what measures they have put in place to protect client funds and what happens in the event of the exchange going under or a cyber attack.”