Looking Past Gamestop: Reddit's Real Influence on Investing

Looking Past Gamestop: Reddit's Real Influence on Investing

Unless you are a diehard gamer, if someone had approached you in late 2020 and asked you about GameStop Corp GME, you probably would have shrugged your shoulders and walked away, but if they did so today, chances are the name would at least ring a bell. That is because GameStop is largely recognized as the first in a whole new class of stocks retail investors are constantly on the lookout for: meme stocks.

While the whole meme stocks movement started with GameStop GME stock's impressive climb in early January 2021, making millions of dollars for retail investors and losing billions to some big Wall Street giants, it is now evident that it never was about GameStop but more about the influence social media has on traders' behavior. Today, no social media has a bigger influence over investing and the stock market than Reddit, the place where it all started.

This post illustrates just how far this social media has come in terms of rallying investors and becoming a place where people get together to plan their next attack on Wall Street.

What Are Meme Stocks?

Meme stock refers to any stock that becomes popular among retail investors thanks to social media. In other words, they're stocks whose prices usually spike because they go viral, much in the way memes go viral on different social media. While the most powerful social media that drives the markets today is Reddit and the r/wallstreetbets subreddit, in particular, other platforms like Twitter Inc TWTR and Meta Platforms Inc FB also contribute to making these stocks popular, usually among young and inexperienced investors.

The first meme stock was GameStop which exploded in January 2021 when thousands of investors bought thousands of shares through the Robinhood app. Other stocks, including AMC Entertainment Holdings Inc AMC, have followed. Today, the r/wallstreetbets subreddit is one of the best places to go to learn how to buy both major cryptocurrencies like Bitcoin BTC/USD, as well as smaller coins like Dogecoin DOGE/USD and Shiba Inu SHIB/USD.

Meme stocks are a part of the COVID-19 pandemic aftermath

Most people credit the existence of meme stocks to the COVID-19 lockdowns that sent many workers home with nothing better to do with their time and money than to start investing in the hopes of improving their financial situation. A second indirect consequence of these lockdown measures was that all major sporting events were canceled or postponed, which heavily impacted the online sports betting community. The members of this community were only too eager to find a new way to gamble, and investing in high-risk high-rewards stocks such as the emerging meme stocks was the perfect fit for them.

Meme stocks may be here to stay

Few serious, self-respecting investors take meme stocks seriously and consider them good long-term investments. Although they can produce incredible profits, they're unpredictable and volatile at best and a great example of applying the greater fool theory at their worst.

In this sense, the surge in price is usually fueled by fear of missing out (FOMO), although other very clever positive feedback loops that take advantage of short-sellers and other types of investors also play a big role in the matter. This means that there is no real increase in the company's underlying value, which, in turn, implies that stock prices tend to plummet shortly after the surge.

Regardless of the cons, with a young generation of investors that grew connected and that let social media drive their actions, it seems like the meme stock movement is here to stay, with Reddit at the forefront.

But, how did this movement really come to be? As I said before, it all started with GameStop.

The GameStop saga explained

The first true meme stock was video game retailer GameStop. Some Redditors and Twitterati started talking about how spurring a surge in the company's stock would force short sellers to sell their positions at a loss, leading to huge profits. They conceived the idea back in 2019, but it wasn't until summer 2020 when many started taking it seriously in the r/wallstreetbets subreddit.

In early 2021, a change in the company's management spurred interest, and Redditors started buying shares. The stock caught fire and commenced a chaotic ride of increased volatility, earning millions of dollars for Redditor investors and losing billions for some big names in Wall Street. The two biggest losers were the hedge funds Melvin Capital and Citron Research, who reported losses of more than 50% in just a couple of days, adding up to more than $6 billion.

Reddit has been the go-to source of information for this new breed of retail investors ever since, making it a power to be reckoned with by traditional investment firms and Wall Street in general.

Reddit's current influence on investing and the stock market

Back in January, when Reddit's influence started, the group of traders and investors that led the GameStop phenomenon were mostly very young and, in some cases, first-time investors with some spare money in their pockets. Most of them also happened to be located in big metropolitan areas, like New York City and London.

While the community back then was by no means small, today, it counts 11.3 million members or "degenerates," which is how they refer to themselves. There are always hundreds of thousands of degenerates online at any given time, making it one of the most important trading communities in the world.

Social media like Reddit are no longer exclusive to young investors

From early January to today, more risk-prone investors have joined the community in the hopes of making another bold move against Wall Street. At first, the group was mostly made of millennials and gen Zs. However, a survey conducted by investing.com among 1,302 U.S. investors showed that, today, more than 20% of investors look to Reddit for investment advice and that more than 17% of all investors aged 40 and above have also used Reddit to drive their financial decisions.

While Reddit is unquestionably king in this field, the same has been happening on other social media like Twitter, Stocktwits and Meta Platforms Inc. In fact, the same survey showed that over half of investors use some form of social media to decide how to invest their money.

Meme cryptocurrencies are also “a thing”

Much in the same way many investors got together to blow up GameStop and other meme stocks, others are now applying the same principle to crypto. Discussion forums are popping up on social media like Reddit where members discuss their next move on small-time altcoins, then use popular crypto exchanges to buy those altcoins and drive their price up.

For some, these new trends signal the democratization of investing, while for others, it's a danger that distorts the market and threatens the status quo.

The bottom line: does Reddit pose a real threat to Wall Street?

A small percentage of investors believe that social media platforms like Reddit and Twitter should restrict the ability to organize retail investors, arguing that it's dangerous for the economy. Furthermore, they say trading platforms like Robinhood - where most of the trades that drove GameStop stock through the roof were made - should restrict trading to retail investors to avoid this from happening again.

On the other hand, a much larger portion of the population believes that the government should protect retail investors against Wall Street, seeing the inequalities between the earnings of hedge fund managers and the people whose money they manage. Whether or not this really changes the game for Wall Street in the future remains to be seen. In the meantime, Reddit proved what people could accomplish if they work together and that there is no power so great that a large enough group of people cannot overtake.

Posted In: Fintechcontributors
Fintech Focus Newsletter

Your update on what’s going on in the Fintech space. Keep up-to-date with news, valuations, mergers, funding, and events. Sign up today!