Earlier this year, the online finance community took the world by storm in what is being referred to as a ‘meme stock frenzy’.
What is a meme stock?
To understand what a meme stock is, one must first understand the meme. A meme is a concept, generally a humorous one, that spreads throughout the cultural zeitgeist. This occurs typically in online forums as a static image, fashion, stories, phrases, etc. Even a tweet can become a meme (see: Bean Dad). Thus, a meme stock is a stock that has risen in investments not because of how the company is performing, but because of a meme that has gone viral and subsequently causes many to invest.
Those not clued up on meme and internet culture were shocked when stock for GameStop, an American electronics retail company, unexpectedly soared. Its share price increased by hundreds of dollars in just days. Young investors and techies all around the world scrambled to get their piece of the pie.
The strangest part of this whole event is that GameStop was headed for bankruptcy before its stock explosion. The average American was stunned when they became aware of the upturn in GameStop shares. The company had been shutting hundreds of stores around the nation, likely because many consumers do their gaming-related shopping online. Unless they had been informed of the online discourse, no one saw this coming.
Where does crypto fit into this?
Soon after the GameStop chaos, another meme stock emerged. The price for Dogecoin, a cryptocurrency rivalling Bitcoin, skyrocketed 200%.
Whether or not GameStop or Dogecoin are worth that valuation is irrelevant. In fact, the valuation for most meme stocks typically does not align with the price changes. The volatility of the market (with regard to meme stocks and cryptocurrency) is entirely due to a whole new finance arena.
With stock market discourse now taking place in various corners of the internet, people are learning about new and creative ways to invest their money from platforms like TikTok, Reddit, and Robinhood.
Traders on Reddit, a social news and discussion website, are having an immense amount of influence on what investor newbies are doing with their money. For example, the reason so many young people decided to invest in Dogecoin is because they read up on it in Reddit forums. Using Reddit as a replacement for financial advisors is problematic (and potentially dangerous) because anyone can post anything there. This means that unverified and unreliable news often circulates at an incredibly rapid rate by just the click of a button.
Why do meme stocks matter?
What these young investors may not have realised at the time of their investment is that Dogecoin was originally created as a joke. Meant as a satirical piece of performance art to comment on the unpredictability of cryptocurrency (and the unlikelihood of it seeing returns), it was, in fact, a meme itself. It had even used a popular meme (the face of the Shiba Inu dog from the ‘doge’ meme) as its logo. How perfectly meta (and clever) of them.
The biggest meme of all, however, is what happened next. Upon discovery of Dogecoin, Reddit users closely following the crypto discussion boards immediately flocked to Robinhood. Robinhood is a stock-trading and investing app that allows users to buy and sell crypto. What the Dogecoin founders had certainly not intended was for their joke currency to be recognised by many as a legitimate prospect.
Perhaps the reason for an increase in the popularity of cryptocurrency is that it is so accessible. Anyone with access to a smart device and an internet connection can participate. The question, though, is whether this is a step in the right direction or a turn for the worse. New investors interested in the digital evolution of trading see this as an opportunity to take the power from the hands of Wall Street, The City of London, and the traditional financial system. However, the problem here is that the redistributed power will land in the novice hands of those that are inexperienced and unqualified.
What do meme stocks and crypto mean for the future of finance?
What all meme stocks have in common is that they encourage risky investment strategies for people that likely don’t have much to invest in the first place. Many have argued that meme stocks are nothing but ‘get-rich-quick’ schemes. They promise large returns (which are highly unlikely) for small investments. These small investments, however, are not so small to novice investors, which is why such schemes can be detrimental.
Some that bought Dogecoin before all the hype did end up making sufficient gains. And of course, the inventors of cryptocurrencies like Dogecoin, Bitcoin, and Ethereum have as well. However, so much hype makes stocks volatile. When the hype fizzles out, the money does, too. For the average trader, this is unreliable and as aforementioned, risky.
Now, months after the GameStop craze, American investor and hedge fund manager Michael Burry has found himself facing a lawsuit. Why? His rhetoric helped catalyse the surge in GameStop’s shares. Then once it surged, he began criticising the stock. The problem? His firm owns a stake in GameStop.
So many have fallen victim to the meme stock frenzy. If crypto is not just a trend and it sticks around (which it looks as though the culture is shifting in that direction), there will be more casualties. Many may see returns, and crypto trading may even make the one-off millionaire. For the average trader, though, this will not be the case without the right advice. Therefore, it is imperative you speak with your financial advisor.
How can you be prepared?
What those turning to social media platforms for financial advice and investing tips miss is the tailored experience that Private Client Consultancy provides. We are not all in the same place financially, so how could a one-size-fits-all approach work for the masses? The answer is that it won’t. Your advisor can perform risk assessments and devise a strategy for you if you are interested in these types of investments.
To schedule a free, no obligation appointment with one of our Wealth Managers, contact us today.