FEAR GREED - Fascination
Bloomberg Businessweek|December 20, 2021
A wild, emotional year drew investors to meme stocks and Bored Ape NFTs—and changed markets
Pat Regnier and Paula Dwyer

There was a huge merger in 2021: the combination of popular culture and modern finance. Tom Brady and Matt Damon were suddenly shilling for cryptocurrency exchanges. Digital tokens that started off as elaborate pranks represented tens of billions of dollars of paper wealth. And cartoon pictures of apes were selling for millions of dollars on something called the nonfungible token market, which almost no one had heard of in the long-ago days of 2020.

This wasn’t always a friendly merger. Small investors teamed up to buy shares of GameStop Corp. and AMC Entertainment Holdings Inc. with the express intention of bankrupting hedge funds that were betting against the companies. Wall Street pros were as flummoxed as anyone by the rise of crypto markets.

Everyone seemed to want in, from teens trading during Zoom school to older folks who missed out on dot-com-era riches and were determined not to let another bubble pass them by without claiming a piece. It’s difficult to know exactly how many people turned themselves into traders. One indicator: Verified users of cryptocurrency exchange Coinbase alone grew to 73 million by September, from 32 million at the beginning of 2019. And the percentage of the affluent using self-managed accounts for at least part of their investments jumped to 69% in 2021, from 35% in 2015, according to a report from research firm Cerulli Associates.

What, pray tell, are they doing with those accounts? “Investors are most likely to concentrate their attention on more volatile offerings, including securities gathering widespread media attention, such as GameStop, AMC, or cryptocurrencies, or within niche themes or sectors in which the investor perceives opportunity for outsized growth in the short to medium term,” according to Cerulli. That’s all the more remarkable considering how easy it was to make money the passive way: A boring S&P 500 index fund is up about 25% so far this year.

Not so long ago, the Certified Serious People of finance were worried that too many investors had migrated to index funds, and that this would distort the markets. How cute. These days we wonder if there will ever be systemic financial risk from joke dog-themed crypto tokens such as Dogecoin.

It’s easy to chalk all this up to an excess of the same emotions that have fueled markets since forever: greed and fear. (In this case, the fear of missing out.) That’s certainly a huge part of the story. Yet there’s another emotion at work here: fascination. The crypto and NFT space is a bottomless rabbit hole of innovation and intellectual intrigue. For meme-stock traders, it’s a fascination with the complexities of market plumbing and how professional traders work the pipes. You aren’t figuring out only what AMC’s business model is, but also how your team can outfox money managers on the other side.

The phrase “proof of work”—the computational effort required to run blockchain networks like Bitcoin’s—can also be applied to the motivations of this new breed of traders. Riches appear there for the taking if you work hard enough, read enough online white papers, listen to enough podcasts, watch enough YouTube videos, study enough social media, learn technical chart patterns, or simply refresh the trading app on your phone frequently enough that you hit the buy button at the right time.

It all revolves around something funny that happened when the coronavirus forced the humans of this planet to isolate from one another: New virtual communities were formed. In this hybrid of financial and popular culture, they meet in Reddit forums and under Twitter hashtags, in Discord and Slack chats, or in text message threads. I have friends who for years have met on Friday nights to play poker. Recently they instead met over Zoom with an NFT expert to discuss parlaying some of their crypto token riches into monetized JPEG files.

It’s easy to spot the most enthusiastic members of these communities. The crypto true believers, like Tom Brady, have laser beams shooting from their eyes in their social media pictures. “Degenerates” of the WallStreetBets Reddit group— 11.3 million strong and growing—have some version of a cartoon kid in a banker’s suit and sunglasses. You have to look closely at the whimsical apes that are showing up on people’s online profiles: It could be a member of the “Ape Army” marching to war for AMC stock or a member of the Bored Ape Yacht Club NFT project sporting one of this year’s hottest digital status symbols.

The value of many such assets is derived solely from the strength and influence of the communities surrounding them. With crypto especially, there’s often no underlying cash flow or real fundamental economics at work at all; nor is any blockchain innovation necessarily required. Want to start your own meme coin? Just copy the open source code from the last one, give it a name, make a few tweaks, and you’re in business. The price of the token will be determined by how well its community pumps it up on social media. Get Elon Musk or another influencer interested, and you’ll be rich in no time. Or maybe at least make a dent in your student loans.

It all seems a little crazy. And it is. It all sounds like it will end terribly. And it probably will. Someone, somewhere has to buy at the top, setting the most ridiculous price so it can be printed in the record books for future generations to laugh at and wonder what was wrong with all of us. Fortunes will be lost, both large and small. Social media profile pictures will change back to professional headshots. When that actually occurs is anyone’s guess. Maybe when the U.S. Federal Reserve shifts to a tighter monetary policy, or when pandemic-swollen savings accounts finally revert back to normal. Or maybe not.

Boom or bust, the growth and influence of online communities and the fascination they’ve created is the real legacy of 2021 for the financial world. Some analysts and writers have taken to calling the phenomenon “identity investing.” “All investors, in my experience, behave in a way that is broadly consistent with their fundamental personality,” is how Chuck McNaughton, senior wealth adviser at ScotiaMcLeod, put it this year.

He was talking mainly about stocks and bonds and the risk tolerance appropriate for each. But could some investors now identify with a cartoon of a shiba inu dog, or an ape? “It’s easy to laugh at, but it’s real,” Steve Kurz, global head of asset management at Galaxy Digital, a crypto investment firm, told me in an interview on the What Goes Up podcast. “You wear that badge and you own a piece of that network as it grows. We have to imagine a world where identity investing has value.”

Who knows which of these new assets will end up being worth keeping, the way Apple and Amazon.com were worth holding on to during and after the dot-com crash. But some certainly will be. Squint and you can see in the flurry of crypto the emergence of what believers call Web3—a whole new future internet built around the blockchain technology that fuels those tokens and art projects. “Like Facebook, where we didn’t know what the economic model or the valuation was going to be until well after the network had grown, it’s possible that we’re just in the early stages of some of this,” Kurz said. “And I think it would be silly to dismiss the value of some of that.”

The laser-eyes crowd will certainly tell you that if you dismiss the future, you’re NGMI (Not Gonna Make It). But it would be even sillier to ignore the lessons of the past, and you don’t even have to reach as far back as the dot-com episode. Meme stocks and crypto aren’t so much bubbles that have continuously inflated but a series of waves that have already swelled and crashed onto shore, only to be followed by the next one. The ARK Innovation ETF—Cathie Wood’s Tesla-and-Bitcoin-heavy fund that took off in 2020 and peaked in February—is off39% from its high. AMC is down more than 60% from the price it touched this summer. Dogecoin faded as NFTs rose.

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