It has been a few boring years when people only used to purchase index funds. However, then came the coronavirus pandemic and brought the investment market into this new trajectory.
A bunch of people who otherwise used to be in sports entered into the caves of mobile-first trading platforms. It happened well because no sports events were going on to bet on. Therefore, these betters started trading into stocks.
No, they were not looking to make any long-term investment. Instead, they were jumping into the market waves with the idea of making quick bucks.
People who had sophisticated trading experience started exploiting the market’s inefficiencies, whereas others started following memes.
And in January 2021, people decided to flex.
Hedge funds were shorting GameStop so heavily that traders found out that if they all ventured in together, they would manage to drive the price up. And they did.
The price went soaring high, and they jumped 1,900% to 347.51 USD at the close of trading on 27th January from a close of 17.25 USD on 4th January. Notably, the move was coordinated on Reddit, subreddit r/WallStreetBets with millions of subscribers.
Of course, there would have been no significance if only one retail investor made a trade. However, retail investors only made the difference as the rallying cry of the subreddit thread cheered: “Apes together strong!”
Consequently, while there have been no fundamental changes to GameStop, their stock surged as retail traders cheered one another. And much to their joy, Melvin Capital, one of the hedge funds sorting GameStop, lost 53% of its investments earlier in 2021 (1), mainly because of the retail traders’ efforts. Notably, another hedge fund that lost big on the GameStop rally shut down completely (2).
And since these meme traders have demonstrated that they could move markets, they had also started piling into other stocks like BlackBerry, Nokia, AMC, and Bed Bath and Beyond.
AMC elected to YOLO with the retail investors and offered them free popcorn. It also announced that customers could purchase their sodas and other offers with Bitcoin by the end of the year (3). Reportedly, there was a pantless Zoom, too (4). Long story short, AMC has managed to stave off bankruptcy, and as of the close of the market on 29th October, its stock is up over 1,600% this year.
The rise of retail investors also led to a new class of investing influencers. Yes, Elon Musk is the most influential of them all. We have discussed his influence in more detail in our previous post, Elon Musk’s Influence on the Cryptocurrency Space.
In other words, there is more incentive than there has ever been to try to become a fiance influencer since there is a huge retail audience than there has ever been. And it has led to a moment: fandomization of finance.
The Pandemic-Led Retail Investment Boom
According to a new Charles Schwab survey, as much as 15% of collective retail investors as of present have only started investing in 2020 (5). Schwab is calling this new investors’ wave “Generation Investor.”
“A huge part of this growth is the generation of investors, a large group of individuals who are tethered together not by their born years but when they started on their investment journey. Most of these individuals are people who are on a path to ownership and reaching their financial goals,” stated Jonathan Craig, senior executive vice president and head of investor services of Charles Schwab (6).
Most of these traders joined platforms like Robinhood and other platforms that offer free trades and fractional shares, making investing easier than it was ever before.
While it is tempting to blame the coronavirus pandemic for the uproar in retail trading, media reports suggest that the pandemic only acted as gasoline to an already burning fire. As per available data, the fire has been burning since the 2008 financial crisis. And the ignition was there even before the pandemic, thanks to mobile apps, free trades, easy information availability, and out-of-money options.
Increased interest in retail investment and cryptocurrency happened parallelly, says the founder of r/WallStreetBets, Jaime Rogozinski (7). They share the same qualities like a focus on memes, online communities, and the general energy of “let’s make money and have fun.” In other words, meme stocks and cryptos are “two manifestations sharing the same ethos,” says Rogozinski.
If You Can’t Beat Them, Join Them
Take NFTs, for example; they are media that allow users to program value in a way that previous media has not pointed out Ali Yahya, a general partner from Andreeson Horowitz. “Today, it is possible to bet on memes or ideas or even artistic trends that people may believe in having a future.”
Incipiently, cryptocurrency was the counterculture of finance, and Bitcoin especially remains a finance-based method to hate the government (8). Meme traders are contemptuous of the system, even though they participate in it. Notably, the 2008 crisis happened because of the big banks gambling on others’ money.
Such an influx of retail investors is something that gains people’s attention. And now, multiple companies have started to capitalize on them. For alternative investments like art, real estate, racehorses, and even sneakers, there is Yieldstreet, MyRaceHorse, Rares, and Artopolie. For retail investors who are interested in venture capital, there are Sweater Ventures and Miventure. If you wish to invest but are not experienced and only have a little money, there is also Acorns.
Interestingly, most of the companies listed above are backed by big venture capital firms similar to Robinhood. One can mistrust or hate Wall Street as much as one wants, but it only builds a new market for Wall Street to exploit.
If an investment bank, or venture firm, or anyone else can make money off anyone’s hatred, they would be silly not to. After all, among big names in the GameStock frenzy was an investment company that correctly called the top according to an Elon Musk tweet (9).
According to Rogozinski, there is nothing wrong with Wall Street making money; the apes gambling can co-exist with Warren Buffet.
Investors and Conspiracy Theories
When Robinhood went public this year, it gave us a picture of its users. Almost three-quarters of the assets under Robinhood come from people aged 18 to 40. Notably, almost half of all new retail trading accounts opened in the United States between 2016 and 2021 were on Robinhood (10).
Millennials and Gen Zers often see money as their major stress source and find personal debt as their primary source of anxiety.
And in a recent Pew survey (11), half of the respondents belonging to the Gen Z demographics reported someone in their households either took a pay cut or lost their job during the coronavirus pandemic.
Interestingly, the major part driving the GameStop frenzy was fury at financial institutes, mostly hedge funds. When it became visible that hedge funds were losing money, some investors’ vicious happiness indicates their pent-up anger from 2008. Yes, Gen Z may not be well aware of scandals at that time, but older Millennials do.
And when Robinhood stopped trading because it fell short of the collateral needs for the Depository Trust and Clearing Corp, users were furious. And a conspiracy theory emerged that big financial players had deliberately shut them down because they had become too powerful.
And such conspiracy theories make a useful window into these investors’ minds, and now most of them are yoloing into being financial influencers.
Fandomization of Finance
Arguably, the most prominent influencer in finance is no one else but Elon Musk, who had been rallying for Tesla stock for the past many years. However, he has endorsed GameStonk fever, Dogecoin, and even Bitcoin. Notably, Bitcoin’s prices have frequently responded to Musk’s tweet.
Yet, there is an entire world of individuals beyond Tesla’s Musk. Any platform, be it YouTube, Twitch, Reddit, or TikTok, has investment influencers. For instance, there is Mrs. Dow Jones on Instagram, Twitter, and YouTube; younger investors take trading tips from TikTok, and there is The Stock Guy on Twitch.
Nonetheless, the chaotic behavior of retail investors, purchasing a stock for fun or because someone you know purchased it, is not what economic theories expect; most of them are created on maximizing utilities. People often trade to be a part of a movement or because they really like that one financial influencer.
There is more. According to Susa Ventures’ Chad Byers (12), it is the one part of the money you can discuss with your friends at the dinner table, stocks. People don’t exactly run around bragging about their high-yield savings account. In comparison, stocks are a conversational, viral topic in the financial world.
And since stocks are viral, there is an incentive to become a stock influencer, get lots of views, and make money higher than bankers. It would also mean that brokerage startups get easy word-of-mouth marketing and reduce their customer-acquisition costs — a win-win scenario.
Hence, we can say that the fandomization of finance was inevitable. It has already consumed the political sphere. For years, the Bitcoin community has also used memes and specialized vocabulary to reassure themselves about their investments.
And it is natural for every fandom to acquire haters.
While Bitcoin has its believers, a Buttcoin community spends their time making fun of Bitcoin followers.
And since fandom runs on emotion, fiance fandom means that the effective trading aspects are front and center. Retail investors don’t claim that they are masters of the universe. Instead, they claim that they are apes.
And even if we put fandoms aside, today’s retail investors are likely to be overwhelmed by their options. Additionally, social media also offers identity-based guidance for investment.
Meaning, if you participate in an online community, it can even influence your identity.
For example, r/WallStreetBets also offers identities for investors who lost their money like many other retail traders. Such practice of posting “loss porn” molds the shame of being a bad investor into the pride for being a community member that is truly yoloing.
And today’s influx of retail investors has the availability of free trades, information, and new platforms. These dynamics can have an outsized influence on finance if retail trading remains strong.
One of the most prominent examples of it includes push notifications.
Here is how it works: Robinhood will send a push notification if, for saying, GameStop shares go up 5%. Hence, you get in at 4.9%, either triggering the push alert yourself or waiting for another trade to do so. And when it goes out, more people will purchase, and you will, however, sell.
It works since platforms like Robinhood default to send push alerts on price. The thing is, these platforms make money every time you trade.
Another trend across these platforms is their user-friendliness. They offer a relatively frictionless experience, and they also create an illusion of near-instantaneous trading.
There is more. When we make trading easier for the general population, it also becomes easier to take many risks. According to Rogozinski, it is quite scary since one can actually get a hold of it through platforms like Robinhood without realizing it. Between options and leverage, it is possible that you would end up making huge trades with little money.
And in an era where brokers are mobile-first apps and not people, platform effects have a huge influence. Meaning, these apps can be so powerful that they influence markets.
For instance, Coinbase, a platform for the crypto community, now can move prices of any crypto token by announcing that it will list them.
In Short, Crypto Currencies are Still Hard for Beginners
Fintech companies have been using memable stocks to consolidate their services. Also, they can direct their large customer bases to their new products effortlessly.
“You are going to go back and rebuild as these dominant single-use products become multi-use and then specifically start banking charters and essentially become full-service digital banks,” says Byers.
Notably, this has already happened. For instance, PayPal and its subsidiary Venmo allow cryptocurrency trading even though they were created to send payments. Another example is the cash management tool of Robinhood (13), which is somewhat similar to a savings account; the only variance is that it is not one virtually.
According to several industry experts, blockchain-based games and finances are coming next as the big thing. Decentralized finance would have gotten more sophisticated, and NFTs are only the beginning.
At first, we at TimesNext were quite skeptical since cryptocurrencies are notorious for scams and can be tough for beginners.
There is also a possibility that retail investors would lose interest. Some analysts have told The Financial Times that it is already happening (14). For instance, Charles Schwab reported an 8% drop in retail trades between the second and third quarters of 2021. The meme brokerage itself, Robinhood, missed its Q3 revenue estimates as fewer people were trading in crypto. It has projected even less crypto trading in Q4 than in the first half of 2021.
And in a way, it also makes sense since the pandemic-induced enthusiasm can’t last forever. At the same time, we can also say that not everyone involved with retail trading would drop out.
Finally, Some Common Mistakes Made by Institutional and Retail Investors
During the coronavirus pandemic, multiple funny trades happened because people got too excited about Musk’s tweets. For instance, Signal Advance, a small component maker with only one full-time employee, witnessed a sharp jump in its valuation after Musk tweeted “Use Signal,” referring to an encrypted messaging app called Signal.
Later, when Elon Musk tweeted about Clubhouse, a voice chat app that was still private at that time, investors accidentally bought shares in Clubhouse Media Group, a completely unrelated Chinese firm.
And recently, when Facebook changed its name to Meta, a material-science company named Meta materials witnessed a sharp rise in its stock (15).
Notably, institutional and retail investors make these mistakes (16), especially when unscheduled events like a new company guide or Musk’s tweet happen.