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This Was the Year When Finance Jumped the Doge

WIRED
Written by publisher team

Last January, a growing group of retail investors who had gathered on an affiliate site called r/wallstreetbets switched to commission-free trading app Robinhood and bought GameStop shares en masse. Despite the video game retailer’s questionable fundamentals, its price has jumped from $17.25 at the start of the month to over $500 by January 28. The event sent shockwaves through the trading floors of the world, made headlines, and caused much public stupor.

Screeds on r/wallstreetbets identified the motivation behind these investors’ trading: hitting hedge funds that had been betting on GameStop stock. It can happen by a diabolical conflation called short squeeze: sending the stock price so high so quickly that those shorting it decide it’s time to buy it before it goes further up – an impulse that in turn pushes the price higher. It worked: some hedge funds lost a lot of money, and this frenzy led Robinhood and similar apps to restrict GameStop trading. From high on Twitter, Elon Musk, CEO of Tesla and SpaceX, posted, “jamestonk! “

But the short narrative only explains a lot. When Lasse Heje Pedersen, professor of finance at Copenhagen Business School, did research on the GameStop incident, he noticed something unexpected. Not many of these seemingly crusading investors were disposing of stocks at the end of the journey, as one would expect of predators willing to collect their loot; In fact, they were clinging to their GameStonks. “[Some of these investors] They didn’t just push it and then dump it out of stock: They’d actually been holding it for a long time,” Pedersen says. “They don’t seem to be buying it just to hurt someone else.” What happened in January 2021 wasn’t just a mutiny against Wall Street — It was something else. Call it, if you like it, The Rise of Meme Finance.

Where traditional investors are supposed to decide which assets or stocks to trade based on a company’s growth expectations or other market conditions, angel financiers – mostly small investors – make their investments based on other considerations, which can vary widely. Stocks or assets may be purchased as a sign of loyalty, or a way of indicating one’s belonging to a particular group; Or they might buy it because it has a funny name or as part of an absurd absurdity, or just to participate in some kind of mob on the internet. To an outside observer, the activity seems illogical and unreasonable. It may be so – or it may simply be that different people have different priorities.

How did it come to this? If you follow Pedersen’s theory, it all starts with social networks. Fill them with a handful of what Pedersen in a recent research paper calls “fanatics” – people who, for whatever reason, believe that something has absolute value, despite the opposite evidence. do it Something An arrow or origin with a memorable, strange or eccentric trait – for example, a connection to fond memories of first-generation consoles. Then wait for the influencer to throw his weight behind him – someone like the richest person (or the second richest person on earth, depending on the day) – and the comic meme will spread like wildfire among the social network’s broader audience.

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