Crypto, Gamestop and the revenge of the millennials

The social media age rocked the stock market this week with Reddit traders causing a short squeeze in the price of Gamestop, a legacy US retailer, which soared in value to more than $10bn at the time of writing.

The internet has been flooded with memes like this one looking at the battle between day traders using fintech apps like Robinhood and the Wall Street establishment, particularly Melvin Capital, the hedge fund with the largest short position in Gamestop. Melvin found itself having to close its position and be bailed out by controversial hedge fund Svengali Steve Cohen’s Point72 and Citadel in a $2.75bn capital issue. Melvin was the principal victim of a short squeeze at Gamestop, which happens where a wave of buying pressure triggers investors betting on a company’s price falling to buy back their short, sending the price of a stock higher.

The tale took on a very 2020s feel when Elon Musk took to twitter to post, simply “Gamestonk!”, with a link to the plucky r/wallstreetbets Reddit address which has been stoking much of the Gamestop euphoria. ‘Stonk’ is a trading term commonly used by trading internet veterans talking about piling into hyped traded stocks. Profits were also made on the deal by another investing contrarian hero Michael Burry, of Big Short fame.

At our blockchain-focused analyst firm Novum Insights we see the Gamestop phenomenon as having some similarities with the hype and euphoria in the crypto space and driven by millennial culture taking over in the investment realm.

In a macro-perspective, millennials had their formative working years marked by the financial crash of 2007 and 2008, and grew up in an era where money printing, bad regulation, the housing bubble, and incompetent government ruled.

Crypto has probably been one of the best ways of undermining and exposing what has been going on with continual reliance on the ‘printing press’ to inflate our way out of a credit-ridden society. The result was initially low relative wages making houses unaffordable to most millennials. Which meant following the financial crisis they all had become natural speculators by the time Satoshi Nakamoto wrote the bitcoin white paper in 2009 and the early fintech trading platforms were becoming easier to use.

At the same time Sarbanes-Oxley and other restrictive regulations ensured that most tech companies like Facebook, Uber and AirBNB have stayed private for most of their period of gains, unlike Amazon, Microsoft and Apple, where public market investors could share in the gains. Markets which abhor a vacuum doubled-down on all of Crypto, Robinhood and other innovative retail investing platforms. The US regulator Securities and Exchange Commission in turn has waged a Trumpian assault on ICOs and now Ripple as a further test case, which if they lose, in turn will trigger a much needed crisis in an early 20th century arguably not-fit-for-purpose regulatory government of the markets and who knows what other perhaps unintended consequences.

Previously, crypto people thought financial markets could be tamed and made predictable but this has undermined many of their long-held assumptions. Anger,(typically from an older generation) towards crypto or the Gamestop/Reddit trading phenomenon is driven by a discomfort about the wacky way of doing things among millennials. The anger may be frustration and fear of missing out but we could be moving from the ‘denial’ phase to the acceptance phase in the economic world mind’s appreciation of what has been going on. In the end, the markets will have the final say.

Where this ends is any one’s guess. Ours is that the regulators and investing traditionalists have been confronted by the internet and the internet is winning.

This article was by Novum Insights’ Toby Lewis and David Henderson.