In the investing world, it is common to hear the terms growth stocks and value stocks. Now, a third category is gaining popularity: meme stocks. Meme stocks generally (1) “trade more on hype than its underlying fundamentals” and (2) are “popular with millennial-aged retail traders.” In recent months, retail traders on Reddit forums were at the center of huge swings in stock market prices. Now that we know conversations on Reddit can significantly influence financial markets, how will the public and regulators react to Reddit in the future?
AMC Entertainment Holdings Inc. and GameStop were both swept up in the recent meme-stock frenzy. Both businesses were struggling until an army of retail investors temporarily came to the rescue. Retail investors are individual, non-professional investors. These amateur traders used a Reddit forum r/WallStreetBets to coordinate stock purchases. When millions of people buy small amounts of a company’s stock, the demand for the stock increases and so does the stock price. In January 2021, these amateur investors drove AMC’s stock value up from $3 to $20 per share and Gamestop’s stock value up from $18 to $347 per share. Although GameStop decided not to issue stock during the frenzy, AMC raised nearly one billion dollars during the meme-stock enthusiasm. As the hype wore off, the stock prices fell to reflect more accurately the struggling nature of the underlying businesses. But r/WallStreetBets is still active. Around 1.5 million users joined within 24 hours during the GameStop frenzy in late January. Now, the subreddit has over 8 million members, with hundreds of thousands of active users at any given time.
Amateur traders on Reddit are now focused on pushing up the price of another asset: Dogecoin. The cryptocurrency surged more than 500% in 24 hours in the last week of January 2021. Although Dogecoin seems to fit the two criteria of meme stock -- traded on hype and popular with millennial, amateur investors -- it is not actually a stock. But, fun fact, it is based on a meme. Dogecoin was inspired by the popular Shiba Inu meme called Doge and was created as a joke in 2013.
Dogecoin co-founders, Billy Markus and Jackson Palmer, wanted to poke fun at cryptocurrencies by creating a random digital currency based on a meme. Mr. Markus, who no longer works on Dogecoin, couldn’t believe joke software code gave rise to a cryptocurrency worth billions of dollars in total market value. The joke cryptocurrency from 2013 came to center stage in 2021 thanks in part to tweets from Elon Musk. Musk, the eccentric billionaire leading Tesla and SpaceX, is a big fan of cryptocurrencies. According to a February 2021 SEC filing, Tesla purchased $1.5 billion worth of bitcoin using its cash reserves. And each time Musk tweets about Dogecoin to his 44.8 million followers, the cryptocurrency’s value goes up a little. Now, a group on the Reddit forum r/SatoshiStreetBets have made it their mission to push Dogecoin’s value from its current value of five cents to $1. If the value of a single Dogecoin reaches $1, the total market value will be worth tens of billions of dollars.
There are two major regulatory concerns around these recent events on Reddit. First, there is a continued threat of market manipulation. After seeing GameStop’s rise, it’s not hard to imagine companies or professional investors paying people to post anonymously on Reddit forums hoping to create the next meme-stock mania. Second, as US Treasury Secretary Janet Yellen stated, if cryptocurrencies rise in prominence and value, then concerns around their misuse to finance terrorism or launder money rise too. These concerns may grow over time as Reddit becomes more prominent. Reddit raised more funding and doubled its valuation to $6 billion amidst all the stock-meme mania. So the law needs to develop to address these two concerns to protect everyday people. What will this regulation look like? Only time will tell.