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four classes from GameStop's value frenzy

February
1, 2021

5 min read

The opinions expressed by the entrepreneur's contributors are their own.

Warren Buffett was very negative about gambling, saying, "Day trading is very close to gambling." and that "gambling is a tax on ignorance." His advice? Getting rich slowly.

Today the capital markets are far from slow. A 3.5 million-user Reddit forum that discusses speculative bets to get GameStop's share price up 2,300% over two months. GME rose from $ 13 in early December to $ 315 in late January. A member of the forum turned $ 50,000 into $ 50 million in just a few months.

WallStreetBets has since grown to 6.1 million users. You describe yourself as "degenerate" on the subreddit channel. The recent chaos over GameStop, AMC Theaters, Dogecoin, and Bitcoin reveals at least four compelling lessons about modern finance.

Related: For GameStop investors, it's Game On

1. It is easier for Gen Y and Gen Z to mobilize capital

In the past, investment capital pooling came from smoking cigars at a country club or Ivy League meeting. Big Finance was an exclusive boys' club. There is still an element of that today. However, socially conscious Generations Y and Z have invested tens of billions in the capital markets by joining retail apps like Robinhood, Beanstox and PayPal. These allow literally anyone (i.e. "stupid money") to gamble, speculate, and trade with an additional $ 5 Starbucks cash or $ 1,000 student loan money or $ 5,000 from Grandma's legacy.

Many “invest” in potential capital gains (without knowing how to properly value a company, as Buffett fears). And just as many naively buy and sell stocks and cryptocurrencies to support a social cause, or give Wall Street bullies a middle finger, like short sellers in the case of WallStreetBets.

If profit is not the main motive, it can wreak havoc as market signals can become invalid. (Melvin Capital needed a $ 3 billion injection of capital to stave off bankruptcy after the GameStop fiasco.)

2. Disillusionment with institutions can lead to money mutiny

Hedge funds short of the declining GameStop stock to capitalize on the demise of a video game company. CoinDesk's Ollie Leech writes, “This was probably an attempt by big players to outsmart amateur traders and panic sales. The WallStreetBets Reddit community saw this as an opportunity to fight back against the financial elite and decided to spark a shopping spree. "

This, in turn, resulted in billions in losses for Wall Street short sellers, a pending investigation by Congress, and calls for stringent regulations.

There are macroeconomic forces blurring the lines of investing, gambling, market speculation, and extreme, hype-fueled trade and price volatility. The repeal of the Glass-Steagall Act by then-President Bill Clinton in 1999 turned the stock market into a gigantic casino by allowing commercial banks to legally offer massive amounts of risky loans for equally massive speculation by politically affiliated hedge funds.

3. Media coverage can be maddening

The democratization of the media and general access to financial technologies have liberalized investing, speculating, gaming and day-to-day trading. Retail investors can wield power when efforts are focused.

On January 29th, meme-based cryptocurrency Dogecoin catapulted 80% in 24 hours and hit a top 10 market cap of $ 7 billion. During the sharp rise in prices, Elon Musk tweeted a picture of a dog in an obvious nod to the meme-based logo of the peer-to-peer currency.

For mischief and underdogs, putting money into a difficult stock (i.e., GME) or a cryptocurrency like Bitcoin is not about pursuing a prudent strategy of increasing your retirement account. It's about lifestyle – basking in the current hype, being a contrarian, financial anarchist, and troublemaker. It's about nakedly berating the billion dollar institutions that created the Great Recession of 2008 and received the tax breaks from friends of the politicians.

Bitcoin (BTC) is a digital commodity that does not generate dividends or cash flow. On January 29, Elon Musk put a Bitcoin logo on his blank Twitter bio, and the price of the crypto rose 17%.

To understand the psychology of what happened, Musk's act symbolizes a rebellious, libertarian streak rather than an attempt to manipulate the price of BTC. (The tech billionaire recently relocated Tesla's headquarters from regulation-intensive California to freedom-loving Texas.)

For members of WallStreetBets, difficult stocks like GameStop and AMC Theaters (as well as alternative digital cash like decentralized Bitcoin and Dogecoin on a dog-meme basis) have the opportunity to point (what they perceive as such) a corrupt status quo with the middle finger. On Jan. 28, Musk tweeted, "You can't sell houses that you don't own. You can't sell cars that you don't own, but you can sell stocks that you don't own!" that's bs – short circuit is a scam … "

Related: What's Up With GameStop? Meme stocks explained.

4. Automation has accelerated the pace of price movements

After all, markets have been automated for more than a decade where key indicators can trigger an avalanche of buy and sell orders. These systems can greatly accelerate the pace of market action, with wealth and losses being made in minutes or seconds.

In addition, fintech innovators are introducing platforms like Mudrex that allow quants and analysts to design, publish, and monetize algorithmic strategies. With such features, investors can rely on autopilots based on a larger thesis or collection of microsignals.

One Decentralized Financial Entrepreneur (DeFi) believes that global connectivity and the speed of light diffusion have resulted in financial tsunamis in traditional capital and digital alt-cash markets. Brian Kerr, CEO of revenue platform Kava.io, says decentralized bandits (via Twitter and Reddit) now have the ability to bankrupt potentially billion-dollar institutions. According to Kerr, in a quote that almost sums up these wild trading weeks, "Wall Street knows they will be disrupted and that the future can be volatile."

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