The COVID-19 pandemic brought with it plenty of disruptive forces limiting industry and the way we socialize with our peers. However, it also seems to have enabled individuals to coordinate in their masses to make money by pumping up stocks and cryptocurrencies. Have we become embroiled in the age of crowdsourced investments?
Throughout late 2020 and early 2021, social media networks like TikTok and community platforms like Reddit have been inspiring users to strategically invest funds on mass into assets that either evoke nostalgia, appear to represent value, or are simply built on meme culture in a bid to inflate their price and earn investors a significant windfall.
Let’s look at three instances where online communities have successfully caused a ripple across the stock and cryptocurrency markets:
Reddit’s GameStop Revolution
The most famous example of online communities confounding experts and generating a surging asset through mass investment can be found in early 2021’s pumping of GameStop shares by a Reddit-based group called WallStreetBets.
As institutional investors, like the $13bn hedge fund Melvin Capital saw an opportunity to short sell shares in the struggling computer retailer, GameStop, WallStreetBets had other ideas for the nostalgia-inducing chain.
Believing that the stock was undervalued, the Reddit group’s members piled their money into GameStop causing the share price to skyrocket.
As the investments began to cause GameStop shares to rise, the short-selling hedge funds were forced to re-buy their positions in GameStop, prompting a further rise in the price of its shares at the cost of their own bottom line.
As we can see from the chart above, losses aren’t uncommon in the world of hedge funds, but at an estimated $12.78 billion dollars lost, the GameStop fiasco had become one of the biggest losses of 2021 for short-sellers.
TikTok Pumping Ripple, DOGE, and Small Cap Altcoins
Reddit isn’t the only network that’s been encouraging mass investment into assets. 2021 also saw TikTok users band together to send various small cap altcoins – the most famous being the meme-based asset, Dogecoin – on significant, albeit brief, price rallies.
In November, TikTok users banded together to send the cryptocurrency Ripple on an impressive surge that hadn’t been seen since XRP was coming down from its last all-time high rally in 2018.
“This is your moment to be Elon Musk…I introduce you to $XRP,” commented the Twitter account @TikTokInvestors. Although Ripple tripled in value at its peak, the success was short-lived.
Despite well-documented regulatory issues, the price rallies of 2021 sent the value of XRP/USD hurtling towards $2 for the first time since January 2018. However, like many sentiment-driven pumps, investor interest dwindled throughout the second-half of the year before finding a range of between $0.30 and $0.40.
The Rise of the Memes
The fallout from the GameStop pump was a watershed moment for social investing. The event caused some digital exchanges to limit user buy options, preventing some investors from buying stocks in GameStop. There were even accusations that Robinhood, one of the most popular trading platforms, had begun auto-selling people’s GameStop holdings.
The fiasco drove some social investors away from stocks and shares and into the altogether more decentralized, open and volatile world of cryptocurrencies.
There are plenty of practical and functional cryptocurrencies available in the world of crypto – from the multi-functional DeFi projects that could offer a glimpse into the future of finance, to Ethereum, which boasts a blockchain network that’s advanced enough to support innovative financial apps.
However, Reddit users turned their attention to Dogecoin, a cryptocurrency created as a joke based on the famous Shiba-based meme first created almost a decade ago.
DOGE is a low-value coin that hasn’t undergone any technical upgrades since 2015. However, it’s generated a vibrant community of fans – one of whom is the world’s richest man, Elon Musk.
The scale of DOGE’s rally was extraordinary. The value of the asset leapt nearly 6,000% between January 1st 2021 and its peak on May 8th.
Despite a subsequent correction, the rampant success of Dogecoin shows that investments can be successful at least for short term holders, even if they’re created as a joke.
With the decentralized nature of cryptocurrencies, we may find more users turning away from Robinhood and towards more alternative exchanges that offer some form of cryptocurrency investment alongside traditional stocks and shares.
In a world recovering from a pandemic that’s seen more people interact online, we could see more mass investments generated through the power of community and social media as markets begin to show signs of recovery later in 2022 and 2023.