Money for Nothing - the alarming rise of Meme investing

The alarming rise of Meme investing: Money for Nothing

And then you turn on the TV, and there's just more of it. The $87 Million lottery winner, that kid actor that just made 20 million on his last movie, that internet stock that shot through the roof, you could have made millions if you had just gotten in early, and that's exactly what I wanted to do: get in. (The Boiler room, 2000)

The recent market surge has been marked by a development many had hoped was a relic of the past—widespread speculation on so-called “meme stocks” and “meme coins.”

In 2021, cryptocurrencies like Dogecoin and stocks such as the beleaguered brick-and-mortar retailer GameStop became centers of a short-lived speculative bubble driven by retail investors, leveraging the viral nature of internet culture. After crashing in 2022, “meme investing” experienced an unexpected comeback in 2024. This resurgence saw speculative interest pushing trading volumes to unprecedented levels. In just a few weeks, the market capitalization of meme coins on the Solana blockchain escalated to over $8 billion, with the largest among them, DogWifHat (WIF), accounting for $4 billion. Indeed, it’s true: A cryptocurrency themed after a dog wearing a hat.

This latest speculative wave has attracted criticism from all sides. For cautious investors, the notion of retail “traders” speculating on assets with no obvious underlying value is downright offensive. Moreover, even within the more permissive cryptocurrency community, there’s a palpable discomfort with the meme coin boom diverting focus from what they consider the legitimate uses of blockchain technology. Addressing these concerns, I propose three arguments. First, that “meme speculation” is not genuine investing but rather a form of gambling. Second, that the proliferation of gambling, with meme coins as a prime example, represents a kind of financial nihilism, which is anything but benign. Third, that this trend of speculative behavior has even permeated traditional financial markets, underscoring the widespread impact of meme investing and gambling in the financial ecosystem.

Rolling the Dice

In traditional investing, decision-making is rooted in a risk/reward evaluation, grounded in the analysis of balance sheets, cash flows, supply-and-demand dynamics, end markets, and other quantifiable metrics. In stark contrast, meme stocks and meme coins are devoid of such tangible fundamentals, exhibiting price movements that are erratic, unpredictable, and detached from conventional valuation methods. The driving forces behind their price fluctuations are short-term hype and social media trends, making their predictability akin to the uncertainty of gambling, where outcomes are more a matter of chance than reasoned analysis.

Hence, I would argue that meme stocks, and particularly meme coins, ought to be considered akin to gambling ventures, aligning with activities like poker, lottery tickets, casino games, and sports betting. A Gen-Z individual, well-versed in an internet culture permeated by memes and engaging in trading cryptocurrencies such as "Bonk" or "Shiba Inu," essentially mirrors a boomer placing bets at horse races. The underlying mentality is characterized by a quest for rapid excitement and immediate satisfaction. While adept timing, luck, and a bit of foresight might result in substantial gains, the most probable outcome is financial loss.

In the United States alone, the gambling industry's valuation exceeds $50 billion, and on a global scale, it's estimated to reach around $300 billion. The industry's growth rate has been remarkable, with sports betting escalating from $1.5 billion annually pre-pandemic to more than $10 billion at present, and casino gaming rising from $40 billion to over $60 billion. To provide some context, the film industry generated $15 billion in the same timeframe. Notably, the most recent Super Bowl in the U.S. attracted bets from upwards of 68 million people. Regarding meme coins, two aspects are particularly striking. First, the market operates 24/7, is global, and immensely large, with trading volumes reaching an astonishing $265 billion USD in March 2024. Second, its unregulated nature exposes participants to risks such as fraud, market manipulation, and abrupt losses due to so-called "rug pulls."

 

The Rise of Financial Nihilism

For many individuals, the occasional bet is seen as nothing more than benign amusement. Indeed, even Warren Buffett has acknowledged his occasional enjoyment of placing bets on football games. However, the concerning statistics previously discussed indicate that we have moved well beyond the realm of innocent entertainment. In a recent article on the blog Epsylon Theory, investor Travis Kling draws a parallel between the proliferation of gambling and the rise of financial nihilism. This concept suggests that for many, the prospects of home ownership, financial security, and middle-class comforts have become so elusive that they are increasingly inclined to undertake greater risks in gambling, enticed by the potential of significant returns. This mindset has led to phenomena like a meme-based cryptocurrency, inspired by a dog, skyrocketing tenfold to achieve a market capitalization of $10 billion in a single day in July 2021. Such occurrences signal a landscape where traditional notions of value and purposeful capital allocation have vanished.

 

Beware Contagion

While traditional financial markets, including bonds, equities, and commodities, have historically been influenced by fundamental investment considerations, signs of financial nihilism are emerging even here. For instance, the derivatives market has seen a surge in the popularity of so-called oDTE (zero Days To Expiry) options, which are essentially bets on a stock’s price that expire on the same day they are purchased. This category has seen its volumes double in recent years, indicating a shift towards more speculative practices. Additionally, consider the dramatic fluctuations in DJT, a meme coin associated with Donald Trump, which boasts a market capitalization of over USD 6 billion and revenues of 6 million. In the current climate, even the most rational, long-term investors find that their greatest profits often come when fundamental analysis is bolstered by a narrative that gains momentum in a meme-like fashion, whether it’s related to AI, weight-loss drugs, or uranium. This trend underscores a shift where even traditional investments are increasingly driven by the kind of speculative fervor that characterizes financial nihilism.

 

Conclusion

In the absence of significant socio-economic or cultural shifts, the allure of meme investing and other gambling forms is unlikely to wane in the near term. As highlighted in Morgan Housel's bestselling book "The Psychology of Money," one interviewee eloquently captures the essence of this phenomenon: " Buying a lottery ticket is the only time in our lives we can hold a tangible dream of getting the good stuff that you already have and take for granted. We are paying for a dream, and you may not understand that because you are already living a dream. That’s why we buy more tickets than you do." For those of us adopting a more prudent and realistic approach, the challenge lies not just in distinguishing between gambling and investing, but also in recognizing the increasing trend of meme-ification within traditional financial markets, and adjusting our risk management strategies accordingly. Concurrently, as value investor David Einhorn has recently highlighted, the prevailing short-termism in the market should encourage us to adopt long-term valuation-based strategies, even though they may currently be unfashionable. Moreover, for those who cannot resist the temptation to take a gamble, it's valuable to remember the sage advice of country music legend Kenny Rogers' song "The Gambler":

You've got to know when to hold 'em

Know when to fold 'em

Know when to walk away

And know when to run