Gamestop, Dogecoin and the democratization of investing (and manipulation of TSLA earnings). Good or Bad?
Members of Reddit community called wallstreetbets had caught on to the fact that Gamestop shares were heavily shorted (at the peak over 130% of the outstanding shares had been sold short). Here is the key (and a very astute observation) that was pounced on by the guy in his mother's basement, and missed by the (insert top school name here) MBA at a NY hedge fund: GME could be vulnerable to a short squeeze. For the less financially literate, what this means is that people who were betting on the price drop would be forced by their brokers, or their fragile psyches, to buy back the shares as they rose and their losses skyrocketed.
By talking up this fact, and that they probably believed that Gamestop would not be going bankrupt anytime soon (Gamestop had recently promoted the co-founder of Chewy to be on the board of he company to help turn its fortunes around), wallstreetbets readers started buying (and buying and buying). This led to a short squeeze, which was probably compounded by large options hedging activity, and eventually the stock rose from the low double digits to an intraday peak of over $470. Retail Investors 1 - Wall Street Titans 0.
That seems like forever ago. Now skip to today. In a backdrop of a phenomenal year and change for the cryptocurrency markets, you could have bought almost any crypto and made a good amount of money. That being said, the Gamestop equivalent has been none other than Dogecoin. A joke when it was created (based on a meme), Dogecoin has now grown to reach over $80bil. in market cap at its peak. If wallstreetbets and its relatively unknown set of retail investors were the cause of the GME rally, the key driver behind Dogecoin's rise is the polar opposite: Elon Musk, the second richest man in the world.
He has tweeted about it numerous times and hence the coin, which was worth 1/5 of 1 cent (yes, that's $0.002) in late 2020, has risen (and risen and risen) to reach over 70cents last night. Where is it now? Hovering around 50cents (or down 20-40% from the highs) in less than 12 hours. This is not too surprising. It was pretty evident that Dogecoin would most likely receive a boost from the fact that Elon Musk was tapped to be the host of Saturday Night Live last night. Hence the fever pitch interest leading up to that (the coin more than doubled from the end of April to last night). What was equally likely is that the writers at SNL would write a set of jokes at the expense of the Doge, which they did, and we have seen some of the hot air come out of the balloon since then.
Many of my professional friends who run large sums of money for banks/hedge funds/mutual funds are highly skeptical of the crypto space in general. They have a hard time wrapping their heads around Bitcoin/Ethereum. It would be virtually impossible for them to even consider an investment in Dogecoin (I have not ventured here either by the way). The only people who I am aware of buying any of the Doge are retail investors (including many of my students). Well done them. Updated scoreboard: Retail Investors 2 - Wall Street Titans 0.
The common thread between the GME and DOGE stories highlights the real change here: the democratization of news dissemination and how the retail investor is able to get such good information with which to make investment decisions. The gap between Wall Street insiders and the man/woman/child on Main Street is as narrow as ever. This has to be a good thing.
This has been born out by research! My good friend Nial Gooding in HK has highlighted the following piece of research, What Triggers Stock Market Jumps, by University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2021-42 (link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3821973). It should come as no surprise that the leading cause of stock market jumps is news/policy from governments. Yet, the one point I would like to focus on is this: 17% of jumps occur for "no-reason", but this percentage has decreased over time. I am certain that one of the key reasons that no-reason is become less significant is due to the increase in technology, means of communicating, which has helped democratize the investment process. Long may this continue.
Drinking a daily glass of wine can be good for your health, whereas a full bottle a night may not be. The same can be true of the previous paradigm. The fact that a few posts on wallstreetbets, or of a tweet by an influential figure such as Elon Musk, can lead to some perverse consequences. Taking a peek at Tesla's earning release from a few weeks ago, approximately 1/4 of TSLA's quarterly net income ($101mil of the $438mil) were due to Tesla locking in some profits on its purchase of BTC. Now I applaud Tesla for having taken the step of buying some Bitcoin as part of its treasury. It's also not entirely clear that doing so led to a sustained rise in the BTC price (although the news of Tesla's purchase did have a short term positive effect on the price). But if a company can use some savvy social media techniques to help enhance their earnings, that probably has to be a bad thing.
At a minimum, the positives are have to be somewhat counterbalanced by the potential dangers of abuse...
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