Are Speculative Investments Like Meme Stocks And Memecoins Worth The Risk?
So far, 2021 has seen the rise of speculative investments. The world became captivated as retail investors combined forces on popular social media sites like Reddit and Twitter to pump the price of meme stocks well past their real value, but it wasn’t only meme stocks that increased. Memecoins have seen their popularity grow as well. However, is investing in speculative investments like Meme stocks (GME and AMC) or Memecoins(Dogecoin, Shiba Inu, Baby Doge, and SafeMoon) worth it, or is it simply too risky?
r/WallStreetBets, Speculative Investments, And Meme Stocks
GameStop, a retail store chain that sells video games, has been struggling for a while. Now that video games can easily be bought or downloaded on the internet, less people are willing to travel to a mall to buy a physical copy of a video game. Some Wall Street hedge fund managers believed that GameStop would end up going out of business like Blockbuster, which would cause the stock price to plummet.
Betting Against GameStop
Since they believed that GameStop would eventually fail as so many other retail stores have following the rise of ecommerce, they decided to bet against the company by short-selling the stock. Short-selling involves borrowing shares in exchange for a fee in the hope that the price will go down and you can buy it back later for a profit. However, if instead of the price going down, it goes up, the short-seller loses money because they bet the wrong way, and they are still expected to pay the fee that allowed them to borrow in the first place.
Short-Selling GameStop = A Big Mistake
In 2020, a user on the Reddit subreddit r/WallStreetBets made the argument that GameStop’s stock was underpriced and a joke began that the WallStreetBets community would take over GameStop. Eventually the joke became a serious plan and it was noticed that hedge funds had shorted the stock. So, the plan was developed to start a buying frenzy of the stock, causing the stock price to increase due to increased demand, which would ultimately lead to losses for the short-sellers and a victory over Wall Street.
Hedge Funds Suffer Losses
When the plan was carried out, in January 2021, GameStop’s stock price soared 1,700%. The r/WallStreetBets community began buying other stocks that had been heavily shorted like AMC, the movie theater chain, which surged 840%. The retail investors short-squeezed hedge funds, forcing them to close their short positions and causing them to lose millions of dollars. Melvin Capital, a hedge fund that bet against GameStop and the main target of the squeeze, experienced losses of 53% that month.
Retail Investors Who Bought Early Make Money While Others Lose Money
Keith Gill, one of the leaders of the r/WallStreetBets effort to buy GameStop stock who is known online as Roaring Kitty, made over $25 million on the GameStop bet. Others who got in on the plan early also made substantial returns. However, the nature of meme stocks is that, because the price is being pumped unnaturally causing the stock to be overvalued, once there aren’t as many people buying in and the focus of investors turns elsewhere, the stock price will fall.
This means that many people who joined the effort to buy GameStop stock later ended up losing most or in some cases all of their invested money when the price came back down from its excessive all-time high. This is why making speculative investments comes with so much risk.
Other Speculative Investments: Memecoins
Between the beginning of 2021 and early May 2021, the value of one of the most well-known memecoins, Dogecoin, increased 12,000%, reaching a high in early May of $0.69. In fact, a $1,000 investment in Dogecoin on January 1st, 2021 was worth $121,052 at the high of $0.69.
The History Of Dogecoin
Dogecoin was created in 2013 as a joke between two engineers based on the doge meme that was very popular at the time. The meme was an image of a Shiba Inu dog with thought bubbles that contained monosyllabic ideas.
Dogecoin became popular quickly, but it only became one of the top digital currencies by market value after Elon Musk and Snoop Dog tweeted about it. The Dogecoin price also increased 600% in January 2021 due to the effect of the GameStop stock short squeeze led by the r/WallStreetBets community.
The popularity of Dogecoin has caused the creation of other memecoins like Shiba Inu (SHIB) and Baby Doge, as well as other speculative coins like SafeMoon.
Important Thoughts On Investing In Memecoins And Speculative Investments In General
These speculative coins and memecoins usually have an extensive community of supporters online who regularly promote the token on social media, but often there is no real company behind the token and they are not designed to add something innovative to the cryptocurrency and blockchain industry.
There is usually no next-generation product that will benefit the space; just a community of people pumping the token in the hopes that the price will go up and they can dump their tokens later. There is nothing substantial backing up the price gain, so the price is likely to plummet after a short time.
That’s why timing is everything if you are hoping to make money from a memecoin or speculative coin. The risk involved with investing in meme stocks and memecoins became abundantly clear upon the mid-July 2021 news that the AMC share price had been cut in half from its peak. As the saying goes,
“Only invest as much as you are willing to lose”.
SafeMoon: Why Investing Early Matters
Still, sometimes, if you get in early enough, it doesn’t take a very large investment to make a great return. For example as an article on the Ascent pointed out, if you had bought $1,000 of SafeMoon when it launched, you would have had 1 trillion tokens. Based on the price of SafeMoon in July 2021, your investment would have grown to be worth a staggering $3.5 million.
So what are your thoughts on speculative investments, meme stocks, and memecoins? Do you think they are worth the risk? Have you personally invested in meme stocks or memecoins?
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