Lynn Johannson, Advisor, Sustainability and ESG
January 4th, 2024
Lynn Johannson, President of E2 Management Corporation and Catalyst for THE Collaboration
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The Roaring Kitty Returns to GameStop. Frenzy Revisited?
Investing | Jun 4, 2024
AI Image: Roaring Kitty
"Roaring Kitty" Returns and Meme Stocks Resurface
News of the video game business GameStop has surfaced again, bringing up memories of the early 2021 meme stock frenzy. Keith Gill, the now-famous investor who was instrumental in the first frenzy, known as "Roaring Kitty," recently disclosed a $116 million investment in the business late last week. This revelation caused GameStop's share price jumped over 70% in pre-market trading on Monday.
The Meme Stock Frenzy Revisited
During the original meme stock frenzy, highly shorted firms like GameStop (GME) were targeted by retail investors, who were encouraged to back the stock by internet forums like Reddit's WallStreetBets. At its peak in 2021, this buying pressure caused the stock price to explode 1,500% and sent shockwaves through the financial world and raised issues about the impact of social media on the stock market.
See: GameStop Testimony: When Short Sellers, Social Media, and Retail Investors Collide
A new breed of investments known as meme stocks (public markets) and meme coins (crypto markets) are propelled by social media hype and the coordination of retail investors. These assets mostly rely on online communities and sentiment because they typically lack strong underlying fundamentals. A couple of other meme stock examples are:
- AMC Entertainment (AMC): Thanks to identical circumstances to those that caused GameStop to boost, the largest movie theatre chain in the world experienced a spike in stock price during the 2021 meme stock frenzy. The heavily shorted company was the focus of a group of retail investors, who drove up the price of the stock. (Read: Is ChatGPT better at predicting stock prices than traditional models?)
- BlackBerry Limited (BB): As individual investors saw potential in the company's rescue efforts, interest in the once-dominant smartphone maker, BlackBerry, surged in 2021. The company specializes on cybersecurity software, but it no longer makes its own devices.
Meme coins have become extremely popularized due to internet trends and celebrity endorsements, such as Dogecoin (DOGE) and Shiba Inu (SHIB). Meme coins, on the other hand, function in the less regulated cryptocurrency market, creating questions over investor protection in contrast to meme stocks, which trade on regulated exchanges.
The Risk and the Allure
Why are meme investments so popular?
See: Birth of the First AI-Generated Memecoin, AstroPepeX (APX)
- Social media groups and and the accessibility of commission-free trading platforms have made investing simpler than ever, drawing new investors looking for rapid returns.
- Memes stocks and coins have the potential to see dramatic price increases, providing investors with the opportunity to make outlandish gains quickly.
- Participating in online forums creates a sense of community among users and a common objective of opposing Wall Street institutions.
Uncertain Waters
Despite all the type, the future of meme investments is unclear since the trend is relatively new.
- The same elements that make them so popular—the hype on social media and the cooperation of individual investors—also cause extreme price swings, which can cause large losses for investors who don't have a well-defined plan. Extremely volatile.
- There are concerns regarding the long-term sustainability of many meme stocks and currencies because to their weak underlying business strategies and low profitability.
See: OSC Report: How Gamification Influences Retail Investors
- A growing number of regulatory agencies are examining meme stock patterns and possible manipulation of the market. Even if no specific measures have been taken as of yet, investor enthusiasm may be dampened by this increased scrutiny. See: CSA and IIROC Issue Joint Guidance (Staff Notice 21-330) for Crypto-Trading Platforms Related to Advertising and Social Media
Closing Thought
Although there is a chance for large profits, meme stocks and coins carry considerable risk. Prior to making an investment, it is essential to understand the reasons for their appeal as well as any potential dangers.
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