Definitions
Meme stocks. “Meme stock” is “internet speak for a stock that was heavily influenced by people online.” (Business Insider)
Memes. Before there were meme stocks, there were memes, which Wikipedia describes as “an idea, behavior, or style that becomes a fad and spreads by means of imitation from person to person within a culture and often carries symbolic meaning representing a particular phenomenon or theme.” The Wiki article goes into much greater depth, covering the meme concept’s origins in biological science, its later application to the internet, and more.
Why meme stocks are controversial
This influence on meme stocks by “people online” leads to exceptional price volatility. By contrast, typical stock prices depend on conventional metrics like long-term growth potential and established value; not the machinations of internet subcultures.
Growth stocks are priced higher because investors expect dominant long-term gains—which increases both potential risk and potential profit.
Value stocks are priced lower because they have less potential to overtake competitors—suggesting that their long-term value may not increase by much, which decreases both potential risk and potential profit.
Meme stocks have high prices despite relatively low value—a temporary quasi-paradox due to non-market forces—like the aforementioned “people online”. External forces can also include FOMO-driven behavior and panic selling.
“people online”
Why meme stocks are making headlines
Groups of individual stock investors have organized across the internet, most notably in the subreddit community known as r/WallStreetBets or WSB. Their plan: to buy certain stocks—ostensibly undervalued ones—in large numbers, thereby inflating their prices. (To be fair, many meme stock investors have legitimate and principled grievances with short-selling—in theory, in practice, or in both; motivations for meme stock traders run the human gamut.)
The resulting stock price increase is good for those bought in early, assuming they either sold their shares for profit during a high point or plan to stick it out for the long haul (AKA those with diamond hands). And it’s very bad for the hedge funds that had shorted the stocks, gambling that their prices would go down.
stonks
Similar effects in cryptocurrencies
Volatility has also increased in markets trading crypto currencies—most notably, Dogecoin. For those wondering, Dogecoin is a cryptocurrency built on distributed blockchain technology—not unlike the popular Bitcoin.
According to its official website, Dogecoin is the “fun and friendly internet currency. Dogecoin sets itself apart from other digital currencies with an amazing, vibrant community made up of friendly folks just like you.”
Different factors are at play in the crypto markets versus the public stock market, but they do have at least one x-factor in common. As exactly no one will be surprised to hear, that factor is Elon Musk.
Interlude
🏆 Elon Musk is two-for-two in The Briefing! 🏆
If you've read the first Briefing about End-to-End Encryption, may recall a Musk mention there as well—after he tweeted an endorsement of the private messaging app Signal. Musk’s Twitter following and the resulting traffic overloaded Signal, resulting in a day-long outage as the team worked to adapt.
That probably wasn’t fun for them, but as problems go, that was one of the “good” ones. It's nice to know that no one is too big to do good deeds when the opportunity arises.Further reading
The GameStop Fiasco Proves We’re in a ‘Meme Stock’ Bubble (James James Surowiecki / Marker) offers helpful context and notable insights, including:
2021 market conditions are related to the 2016 US presidential election through disruptive technologies1 and irreverent internet subcultures
observations of meme-driven positive feedback loops2 in options trading
Disruptive technologies are one of three existential risks to humankind monitored by the Bulletin of the Atomic Scientists—keepers of the iconic Doomsday Clock.
In complex and interdependent systems, positive feedback loops can trigger catastrophic system failures. Examples of complex interdependent systems include various critical infrastructures, both hard (physical structures and processes) and soft (human activities, institutions, and cultural norms).
Further background on related system failures:
Positive feedback loop at Economics Help | Herding behavior, irrational exuberance, network effects, and more
Virtuous circle and vicious circle | Positive feedback loops and catastrophic system failures
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