No end to investing in meme stocks, cryptocurrency and more
SAN FRANCISCO – All year round, amateur investors, driven by a social media frenzy and a bit of boredom, have been investing money in risky forms of investing like meme stocks, SPACs, and Bitcoin.
With the pandemic easing in the United States and the country reopening, many market watchers expected the investment world to return to something akin to normalcy.
This does not happen. Over the past month, overlapping investment fads have become even more unpredictable. Specialty acquisition companies, known as SPAC, a fashionable way for companies to go public, have dried up. Investments in digital art – another pandemic favorite – have also fallen. Bitcoin lost almost 30% of its value last week alone. But so-called memes stocks have skyrocketed.
Over Memorial Day weekend, individual investors rallied on social media to push up the stock price of AMC, the besieged movie theater, pushing shares up 71%. On the upswing, AMC announced a new investment of $ 230 million from a hedge fund. Hours later, the fund emptied stocks, calling AMC “overvalued”. The action soared even higher.
This sent a clear message: The boost that defined investing in the pandemic is not disappearing as people with money to burn switch from one new idea to another, inflating the value of stocks and digital items beyond what many traditional investors would consider rational.
“Volatility moves from market to market,” said Gavin Baker, investor at Atreides Management, which backs stocks and private companies. “I see it as the new normal.”
Some attribute the volatility to the vagaries of the pandemic. Past downturns have hurt the economy in predictable ways, leading to predictable recoveries. But the pandemic has decimated some industries, like travel, entertainment and restaurants, while others, like e-commerce, social media and software, have skyrocketed.
The biggest driver of risk-investing fads has been excess money in people’s pockets. Bank deposits increased further in the first three months of the year, reaching $ 18.5 trillion, compared to $ 15.8 trillion in the same period of 2020. Although this may slow with the recovery in spending on leisure, interest rates remain low, causing people to take more risk with their money.
Leading investors have started talking about these risks, although the VIX, an index that measures volatility known as the “fear gauge,” remains low. Barry Silbert, a cryptocurrency investor, predicted that volatility would soon increase in response to “macro fireworks” caused by factors as diverse as food prices and overvalued cryptocurrencies. Michael Burry, the investor featured in “The Big Short”, predicted “the mother of all crashes” and called market activity “unnatural, senseless and dangerous”.
Douglas Boneparth, president of financial advisory firm Bone Fide Wealth, said: “This is one of the most uncertain times we have existed – economically, socio-economically, from a health perspective.
He added: “As long as there is uncertainty, there will always be volatility.”
Many investors are riding the erratic market even when their bets don’t seem so hot. Steve Veerman, 36, a software developer in Waterloo, Ont., Has spent thousands of dollars to create a collection of digital basketball cards called “moments” on a site called NBA Top Shot. The site uses blockchain technology, which underpins cryptocurrencies, to authenticate its digital collectibles, called NFTs, or non-fungible tokens.
Veerman’s collection is now worth a life-changing amount of money on paper, even though the overall value of Top Shot moments has fallen 64% since February. After the National Basketball Association finals next month, that could go down further.
Veerman does not intend to stop buying or cashing; he believes digital collectibles will outlive collectible cards. He acknowledged that there would be “a lot of price volatility” along the way. “It’s not for the faint of heart,” he said.
NFT sales exploded earlier this year, promising a new way for artists, musicians, performers and more to make money online and hit the headlines with million dollar sales.
But the rush of people peddling NFTs made it difficult to differentiate projects, causing offers to become increasingly absurd, like Joe Exotic’s fringed leather jacket from the documentary “Tiger King.” NFT sales are down 90% from their euphoric peak in early May, according to an analysis by Protos, a crypto-focused media company.
Drew Austin, an entrepreneur and investor, has invested heavily in cryptocurrencies and NFTs, including digital horses, digital sports cards, and some digital arts. It suffered a “substantial liquidity blow” when cryptocurrency prices collapsed in May, he said. But he’s not cashing, because he thinks these new assets are the future. Yet volatility can be stressful. Unlike a stock exchange, these new markets never close.
“There are nights when I go to bed and I’m like, ‘Please, my God, China, don’t ruin this,’” he said, using louder language. “It’s 24/7. It never stops. “
Bitcoin’s volatile month – dropping around 65% in May, recovering some and then falling further this week – hasn’t swayed investor enthusiasm. A recent survey by The Ascent, a financial services rating site, showed that Gen Z investors viewed cryptocurrencies as slightly less risky than individual stocks.
But they learn that crazy price swings can happen on just one tweet. In February and March, when Elon Musk and his company Tesla embraced Bitcoin, its price soared. In May, when Musk tweeted that Tesla would not accept Bitcoin payments due to its environmental impact, its price fell.
It jumped out again this week when Musk suggested on Twitter that Tesla would accept Bitcoin again someday. (His tweets also propelled Dogecoin, a cryptocurrency joke based on a Shiba Inu meme.)
The sustained appetite for risky bets has fueled companies, like Robinhood, which allow clients to trade stocks, options, and cryptocurrencies. In January, Robinhood’s role in memes stock trading put him in hot water with Congress, state regulators and his clients.
The attention has only supercharged Robinhood’s growth: revenue more than tripled in the first three months of 2021 compared to the same period last year. Robinhood plans to go public in the next few months.
All of this puts accountability-advocating investment firms in an awkward position. Studies show that passive and diversified investing outperform active trading over the long term. But when your clients want Dogecoin, what should a financial advisor do?
Betterment, a robo-adviser company, expects the world to return to diversified index funds “and some of the fundamentals of long-term investing that will need to prevail overall,” said Sarah Levy, CEO of the company. Yet that can’t stop people from getting into risky alternative assets on other platforms.
“They are going to be part of the story of the week,” she said.
There are signs that risk appetite may be waning. Litquidity, an anonymous finance social media account, observed that people riding the wave of AMC stocks this month seemed more willing to sell this time around than in the past.
“Retail investors have understood the ridiculous and unsustainable nature of sky-high stock prices,” Litquidity said in a direct message on Twitter. “People are looking to lock in their earnings. “
Other fashionable investments fizzled out under scrutiny. SPACs are shell companies that go public in the hope of finding a private company to merge with, thereby making that company public. More PSPCs went public in the first three months of this year than all last year, and investors eagerly bought the shares in hopes of participating in the next big thing.
Lordstown Motors, a booming electric vehicle company that went public through PSPC last year, saw its valuation climb to $ 5 billion. But in January, a prototype of his vehicle caught fire. Soon after, the Securities and Exchange Commission and Congress began to review SPAC disclosures and accounting practices and began investigations into several companies, including Lordstown.
The news cooled the market and the number of SAVS made public suddenly slowed down. Last week Lordstown said it would run out of money before it could start production. Then its CEO and CFO resigned, causing its share price to drop. Days later, the new management of the company said Lordstown would not be strapped for cash after all. The stock jumped 16%.
Then, on June 17, Lordstown admitted in an SEC filing that its executives had spoken poorly; the company did not have “firm purchase orders” for the vehicles. The share price fell and the roller coaster continued.