Best Lessons From GameStop’s Price Frenzy
Avalanches and tsunamis happen in the natural world. Why not in modern finance?
Warren Buffett has expressed very negative view towards gambling, saying, “Day trading comes very close to gambling.” and that “gambling is a tax on ignorance.” His advice? Get rich slowly.
These days, capital markets are anything but slow. A Reddit forum of 3.5 million users that discuss speculative bets banded together to push GameStop’s stock price 2,300% over two months. GME went from $13 in early December to $315 by late January. One forum member turned $50,000 into $50 million in just a few months.
WallStreetBets has since grown to 6.1 million users. They describe themselves as “degenerates” in the subreddit channel. The recent mayhem surrounding GameStop, AMC Theatres, Dogecoin and Bitcoin does, at least, reveal four compelling lessons about modern finance.
- It’s easier for Gen Y and Gen Z to mobilize capital
In the past, pooling investment capital came from smoking cigars at a country club or Ivy League reunion. Big finance was an exclusive boys’ club. There’s still an element of that today. However, socially aware Generations Y and Z have injected tens of billions into the capital markets by joining retail apps like Robinhood, Beanstox and PayPal. These allow literally anyone (i.e., “dumb money”) to gamble, speculate and trade with extra $5 Starbucks cash or $1,000 student loan money or $5,000 from grandma’s inheritance.
Many “invest” for potential capital gains (without knowing how to properly value a business, as Buffett feared). And just as many naively buy and sell stocks and cryptocurrencies to support a social cause or, in the case of WallStreetBets, give a middle finger to Wall Street bullies like short-sellers.
When profit isn’t the primary motive, it can wreak havoc, as market signals can become invalidated. (Melvin Capital needed a $3 billion capital infusion to avert bankruptcy after the GameStop fiasco.)
- Disillusionment with institutions can create monetary mutiny
Hedge funds have been short-selling GameStop’s steadily declining stock, seeking to profit in a video-game company’s demise. As Ollie Leech of CoinDesk writes, “This was likely an attempt by large players to out-muscle amateur traders and induce panic selling. The WallStreetBets Reddit community saw this as an opportunity to push back against the financial elite and decided to whip up a buying frenzy.”
That, in turn, led to billions in losses for Wall Street’s short-sellers, a pending investigation by Congress and calls for stringent regulations.
There are macroeconomic forces that blur the lines of investing, gambling, market speculation and extreme, hype-fueled trading and price volatility. Then-President Bill Clinton’s repeal in 1999 of the Glass-Steagall Act turned the stock market into a gigantic casino by enabling commercial banks to legally offer massive sums of risky credit for equally massive speculation by politically connected hedge funds.
- Media coverage can fuel a frenzy
The democratization of media, as well as mainstream access to financial tech have liberalized investing, speculating, gambling and day trading. Retail investors can wield power when efforts are concentrated.
On Jan. 29, meme-based cryptocurrency Dogecoin catapulted 80% in a 24-hour period and reached a top-10 market capitalization of $7 billion. During the extreme price surge, Elon Musk tweeted a picture of a dog in an apparent nod to the peer-to-peer currency’s meme-based logo.
For mischiefs and misfits, putting money in a struggling stock (i.e. GME) or cryptocurrency like Bitcoin isn’t about pursuing a prudent strategy for increasing one’s retirement account. It’s about lifestyle — to bask in the momentary hype of being a contrarian, financial anarchist and troublemaker. It’s about naked-ass-mooning the very billion-dollar institutions that caused the 2008 Great Recession, and which received taxpayer bailouts from politician friends.
Bitcoin (BTC) is a digital commodity that doesn’t yield any dividend or cash flow. On Jan. 29, Elon Musk put a Bitcoin logo on his empty Twitter bio and the crypto’s price surged by 17%.
To understand the psychology of what is transpiring, Musk’s action symbolizes a rebellious, libertarian streak and not an attempt to manipulate BTC’s price. (The tech billionaire recently moved Tesla’s headquarters from regulation-heavy California to freedom-loving Texas.)
To members of WallStreetBets, struggling stocks like GameStop and AMC Theatres (as well as alternative digital cash like decentralized Bitcoin and dog-meme-based Dogecoin) create an opportunity to point a middle finger to (what they perceive as) a corrupt status quo. On Jan. 28, Musk tweeted: “u can’t sell houses u don’t own u can’t sell cars u don’t own but u can sell stock u don’t own!? this is bs – shorting is a scam…”
- Automation has quickened the pace of price action
Finally, markets have been automated for more than a decade where key indicators can trigger an avalanche of buy and sell orders. These systems can significantly quicken the pace of market action where fortunes and losses are made within minutes or seconds.
Moreover, fintech innovators are introducing platforms like Mudrex that allow quants and analysts to design, publish and monetize algorithmic strategies. Capabilities like these allow investors to bet on auto-pilot based on a larger thesis or from a collection of micro signals.
One decentralized finance (DeFi) entrepreneur thinks that global connectivity and light speed dissemination of information have created financial tsunamis in the traditional capital and digital alt-cash markets. CEO Brian Kerr of yield-farming platform Kava.io says that decentralized bandits (via Twitter and Reddit) now possess the capability to potentially bankrupt billion-dollar institutions. According to Kerr, in a quote that just about sums up this wild couple weeks in trading, “Wall Street knows they’re being disrupted and that the future may be volatile.”