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Traders who have coordinated on social media to promote stratospheric prices of meme stocks, such as GameStop GME, + 12.74%, and cryptocurrencies such as bitcoin BTCUSD, -4.59% and dogecoin DOGEUSD , -5.52%, what are they doing exactly?
They don’t day trade, but hang on to life, (HODL) as the group describes. They don’t index because they see the whole stock market as corrupt. They are certainly not quality investors because their process challenges financial analysis.
While indexers, day traders, and stock pickers each have a different approach, all are conscious and diligent participants in a traditional market. The same goes for activist shareholders, who may demand changes, from board composition to dividend policy, but accept the corporate framework and associated performance measures. Others use their position as shareholders to defend social causes, from consumer protection to a diverse workforce, but the goal is clearly stated and the proposals formulated, often in a proxy statement. of the target company.
Most of today’s followers of memes and crypto stocks operate outside of these familiar forms of market behavior or investment theory. Rather, they protest against Wall Street capitalism, revel in the disruptive poisoning of the markets, or rejoice in creating the fantasy of an alternate reality.
The behavior of most of these participants can best be explained by an emerging branch of economics called identity economics. Initiated in a book of the same name in 2010 by George Akerlof and Rachel Kranton, the books focus on behaviors at odds with traditional economic models of rationality, such as why people vote against their economic interests or why they stay in jobs. earning less than them. could elsewhere.
Identity economics attributes such choices to our conception of who we are and other social considerations. People enjoy working with certain colleagues in a particular organization when they share distinct standards and goals. When employees feel they have a shared mission, their sense of culture compensates for a lower salary. This is one of the reasons HR departments invest in corporate culture artifacts, from mission statements to mantras.
The meme-crypto trading culture is like that. Just as employees who see themselves as insiders work for less, members of this cohort bet their capital on the riskiest bets possible without worrying about the corresponding returns. The participants share a code and a language: they HODL or will reach the moon.
Dogecoin enthusiasts call themselves subscribers, referring to the breed of their mascot Shiba Inu. And just as corporate culture and employee identification can be decisive for the success of a business, this sense of identity within the group is essential to the sustenance of dogecoins.
The crypto cult is a new force that all investors need to consider. For indexers, their presence injects volatility into the ever-fluctuating market, a bigger shake than the ordinary risks of companies that indexing diversifies. Short sellers, focused on shorter-term market prices, face significant additional risks, as GameStop’s price spike revealed earlier this year.
Even quality investors, who care more about business value than market price, face headwinds from the persistent mispricing of risk. After all, the identity economy can influence prices and returns on investment anywhere, regardless of underlying business characteristics or competitive advantages. The strongest company reduces brand strength, economies of scale and network effects can drive rivals, upstarts and disruptions away. But not the identity economy.
Traditional investors of all stripes will benefit from learning from this cohort to assess risk. Such cults throughout history eventually crumble, as some members fail, others follow, and the culture crumbles on itself. Using the markets to protest against the markets can be extremely dangerous.
Lawrence A. Cunningham is a professor at George Washington University, founder of the Quality Shareholders Group and editor, since 1997, of The Essays of Warren Buffett: Lessons for Corporate America. For updates on quality shareholder research, sign up here.
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