Behold! Witness the Power of Community & Decentralization on the Stock Market
How r/WallStreetBets and GME turned the global stock market on its head, and how to address the market’s malignant response.
By Don Gossen & Hector Michel
Depending on who you are, the last few weeks in the global markets have either been a spiritual enlightenment or a wake-up call. From a crypto point of view, what’s transpiring on the traditional market side seems almost pedestrian by our standards, but also a vindication in our belief that the power of communities can effect real change to our individual agency and self determination.
From a traditional trader point of view, this has been a once in a generation revolt against hedge funds. Specifically, the hedge funds which have made it a common practice to take short positions on a stock and then blast out negative messages through media and social sites to hurt the stock’s value.
Whatever side you’re on, it’s been a wild ride!
First, what the heck is going on?
Unless you’ve been living under a rock for the last couple of weeks, you’ve heard that something curious is going on in the global markets. For those of you who are not familiar with the situation, GameStop, a brick and mortar company that sells physical video games and novelty collectibles, has seen its share price explode to unprecedented heights despite having an extremely questionable business model and little short, medium, or long term financial upside. Essentially, a massive game of chicken transpired between retail and institutional investors, with retail investors cooperating together to pump GME, GameStop’s stock and ticker, and undercut a shorting strategy adopted by institutional investors keen on driving GME’s price down.
The result has been nothing short of chaos, with wild west style trading tactics, some dubious behavior on the side of exchanges, and incredible gains and losses. One retail investor that goes by the Reddit handle u/deepf&$kingvalue turned a $53k investment 17 months ago into, at one point, a $40M+ profit. These are crypto style gains within a space not used to such volatility.
It’s a script worthy of Hollywood with the story taking place in real time, with real people and with real livelihoods involved. Now that the mainstream media has taken note, the story has taken on a life of its own. The following is intended to bring some perspective and levity to the story, explaining things as they’ve occurred, and a potential solution to the problems laid bare.
LET’S GO! 🚀🚀🚀
How did we (probably) get here?
In order to understand what’s going on, we need to look at where we came from. In part, what we’re witnessing play out today is a result of UX improvements over the past half decade, plus the pandemic we’ve been facing for the last year.
Prior to 2020, the global stock markets were primarily the domain of institutional investors and corporate oligarchs with a sprinkling of retail investors who plied their trade as day traders. These day traders were historically marginalized, facing significant barriers to entry in the form of large liquidity prerequisites, accreditations, and onerous KYC. The markets were not an easy place for your regular John Doe to get involved.
This all began to change, however, around the mid 2010’s with the emergence of online trading applications like Robinhood, Trade Republic, FreeTrade, etc. These apps specifically targeted retail investors, offering zero transaction fees, low to zero balance requirements, and, most importantly, slick UX.
The online trading apps had an impact almost from the start. Their zero commission structure forced the established players like Charles Schwab, TD Ameritrade, and other contemporaries to reduce or eliminate their fees in kind. The market took notice — there was a new player in the market: the Retail Investor.
Fast forward half a decade and the results for these new online trading apps were consistent growth, good returns, and better valuations. Motivated retail investors had found a means to trade with reduced friction. However, these new apps and associated influx of new traders still lacked the collective size to change market dynamics.
Enter Covid-19
With the pandemic came the lock downs, and with the lockdowns came an isolated, restricted, and bored population. This attention deficit led people to move into alternative forms of entertainment, one being the stock market. The result was an explosion in growth for online trading apps. For Robinhood, revenue quadrupled in the first two quarters of 2020, from a total of $69M in 2018 to $271M for the first two quarters of last year. The app also logged 3 million new accounts in the first quarter of 2020, against 4 million for the entirety of 2019. The average age of a Robinhood investor: 31; the average account size: $1k to $5k.
These non-traditional investors brought with them an unorthodox trading “style”, guided less by fundamentals and more by a pure speculative approach associated with gambling. Being younger investors, they flocked to information hubs they were familiar with, like Twitter and Reddit, espousing “not strategies” and sharing “not trading advice”. The result was social media meets equities trading.
r/WallStreetBets — A Community with Purpose
Within these digital communities, participants were creating a “cult of personality”. Driven by memes and underground vernacular, threads emerged to stoke FOMO (Fear Of Missing Out) and drive new traders to jump in on specific stocks identified by community members/influencers as communal investment targets.
One hotspot in particular, the subreddit r/WallStreetBets (aka “WSB”), became the vanguard of this social experiment. Adopting an aggressive style reminiscent of the crypto space, day traders goaded one another into “stonk” positions that would fail any traditional outlook on fundamentals.
For those on the outside, these traders seem absurd, irrational, and short sighted. But this perspective misses much of the point. Gains are just part of the benefit. Also significant is the sense of community and belonging, something largely missing from the physical world during extended periods of isolation. People flocked to these communities to participate in something greater than themselves. Who cares if the investment strategies are unsound when participating in a communal activity helps fill an equally important social void? Investors were enjoying themselves regardless the up- or downside.
A social Reddit fund movement had been born, and that movement needed a target.
The GME Moonshot
The early identification of a strength or vulnerability in a company’s stock is critical to the success of the investor. When you are fortunate to come across a key finding pointing in either direction, then the natural next step is to position your investments accordingly in order to maximize your gain. The challenge that retail investors face under this scenario is that in many cases, even if your finding is correct, you lack the capital to push the stock past the tipping point at which you can reap the rewards. Instead, you are left recognizing a loss, or, worst yet, a bag holder.
We are all bombarded on a daily basis with a plethora of information providing us with advice and guidance on what stocks to purchase. We have given “rock star” status to many TV personalities who the retail investor has been trained to think are there to hand out winning lotto tickets to the viewer.
The success of the r/WallStreetBets group was, in retrospect, very simple. They did not focus on the popular stock consistently being covered by the talking heads. Rather, they identified a vulnerability in a position taken in a stock, GME, which no one gave much thought to up to recent days. Once they had the target in their cross-hairs they applied the X factor: Community. It was a simple catalyst to make this stock go parabolic…they all showed up!
This squeeze was not the result of a large hedge fund (HF) looking to benefit off of Citron Research or Melvin Capital. This squeeze was the byproduct of a number of retail investors who used social media to plan and execute on the creation of a social fund that not only hurt Citron Research and Melvin Capital financially, but also opened the world’s eyes to the darker side of the global market systems.
The response?
The response has been nothing short of pandemonium, with some activities bordering on malfeasance. The early success of the revolt initiated by the r/WallStreetBets group put all eyes on the impacted HFs and how they would punch back. The natural expectation was that the loss exposure would force them to cover their positions and, in doing so, provide a win to the movement. Although the parabolic rise of the stock price lacked any level of congruency with the company to which it related, it would be the fear of a large scale social movement, the Reddit fund, that would force the HF’s hand to hit the sell button.
Then came the list. On January 27, 2021, Robinhood and other online trading apps restricted their customers’ access to 3 stocks: GME, AMC and KOSS. The restriction applied was for the buy side of transactions, but still allowed their customers to liquidate. The obvious outcome of such a scenario would be a sell-off of the stock which would drive it to crash. Who would benefit? The HFs who were allowed to continue to freely transact on those stocks. Who would lose? The retail investor who was left vulnerable, having no choice but to watch the value of their investment tank.
So what’s the solution?
Much of what’s on display has been derided by the crypto scene for years. Whether it’s the foul play on behalf of exchanges or the overall lack of transparency, one thing is certain: the flaws and drawbacks of the stock market have once again been laid bare for all to see.
The issue lies with the fact that the world of global investments is centralized through and through. From the traders to the brokers to the exchanges, they all seemingly act in concert for their own gains with limitless disregard for the principles of open markets. These players will use every unscrupulous trick in their arsenal to squash an upstart that challenges the status quo. All in the name of “privatized profits, socialized losses”.
This is the antithesis of decentralization and crypto’s inherent belief in communal growth. The Web3 community is pushing for openness and enfranchisement for all, regardless of background or trading strategy. There exists a strong conviction that the tide will lift all boats. That transparency and reputation are paramount to success.
Had the same scenario played out in DeFi (Decentralized Finance), for instance, there would have been no way for WSB day traders to be locked out of Uniswap or Sushi to make their trades. Sure, their trades may have cost a lot more than on Robinhood where they’re “free”, but any price is conceivably smaller than the cost resulting from a loss of control.
Now this new cohort of unorthodox investors, the social or Reddit Fund, has a choice to make: they can grin and bear it, they can demand changes be made for a more open stock market, or they can vote with their feet and leave altogether. Given the traditional market’s history, it is unlikely to expect substantive change.
So perhaps it’s time for them to leave for a more open and welcoming community in the crypto space. To all those that decide to leave behind centralized markets for the decentralized alternative, let us be the first to say,
Welcome home you diamond handed smooth brains!
Keyko is a Web 3.0 solutions provider offering integrated decentralized solutions and advisory for enterprise and startups. We thrive on providing organizations and individuals insights into this emerging digital world where capitalism and ownership are being profoundly rethought.
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