This month saw one of the most extraordinary events in markets for years as an army of diehard retail traders “took on” hedge funds by pumping up prices of heavily shorted stocks
At the start of February struggling retailer GameStop was singled out as a business to “save” from circling hedge funds who were busy lowering its share price. A merry band of retail investors turned the tables on the professionals, buying up shares in GameStop and pumping them up to ludicrous levels, crushing some of the hedge funds who had shorted them.
The frenzy filtered through into other markets, with UK firms Pineapple Power and Argo Blockchain among those seeing huge levels of interest and price appreciation.
The saga continues now, with GameStop seeing its shares pushed up sharply once again by retail investors – its shares have risen over 200% in the last few days, with no actual news coming out of the business.
It wasn’t just equities that saw huge gains. Crypto has been another focus for users on WallStreetBets, and chief among those in Redditors’ sights was Dogecoin.
Investors on social media began to ‘pump’ DOGE, driving the price up artificially through memes, misinformation and hype. It jumped to an all-time high of $0.08 after Tesla boss Elon Musk tweeted his support for the coin. Musk is now under investigation by the Securities Exchange Commission following his Doge tweets (an investigation that he branded as ‘awesome’).
Crypto has long been easily influenced by social media chatter and hype, but this month the sector has exploded, with record highs coming weekly thanks to statements of support from some of the world’s leading businesses and figures.
Some of that euphoria has since dissipated, with prices coming back down. However, the correction (at the time of writing) has been very marginal when you consider bitcoin has risen more than 400% in the last year, even after taking into account the big sell off last week.
What conclusions can we take from memecoins, pump and dump scenarios, and Elon Musk tweeting photoshopped pictures of him and Dogecoin in the Lion King?
Firstly, it is that for some areas of the internet, investing and trading are expressions of personality. For every trader buying DOGE to make a quick buck, there is another buying the crypto for fun. Markets are chaotic, and as humans we look to find reason in madness, but sometimes people are just there for the ride, and to say they were there. It’s an alien concept to much of investing, but with crypto it rings true, with many proponents of this emerging asset class truly believing it can shake up the financial system.
The Reddit saga also showed that investors are becoming more aware of their own power if they act as a collective. In the world of Reddit boards, Telegram groups and Twitter hashtags, organising a mass purchase of an asset with thousands of others all around the world is now child’s play. Day traders know that they can band together to devastating effect, as a few former hedge fund managers can now attest to.
Perhaps most importantly, firms in financial services should recognise this power and traders’ motivations.
We can question how much influence they really had versus the big boys in markets, and many have said their influence was overplayed. But ignoring these trends is foolhardy, and professional financial services firms must be wise to these events. If not, they may just find themselves chasing their own tails.