2021 is not the typical regular year in any sense, much like its predecessor. The same can be said about the recent trends in the financial markets. Meme stock, meme coins, and NFT are the common parlance. Yet, surprisingly, none of these terms exists in the traditional finance theory.  If you follow global financial news, for sure you have heard these terms. All of these have indeed become a fad and are inching up in the investment avenues ladder, despite tough competition from traditional asset classes like equity, debt, gold, etc.

Though investing in them blindly may not be a wise financial strategy for most investors, learning about the phenomenon can help understand the risks associated with the stock market. Overlooking the impact of the new developments could potentially be an expensive oversight. 

Meme (pronounced as ‘meem’) is ubiquitous in today’s digital world. Social media plays a highly influential, dominant role in our lives, leading these memes to permeate our financial world. One can see several posts on Twitter, Reddit, and several other platforms relating to different stocks and other asset classes.

Defining meme stocks is not easy (at least not in the same manner as growth and value stocks discussed in textbooks). Meme stocks are often characterized as overpriced and highly volatile stocks (high speculative interest). Their valuations are done based on the future potential and not the fundamentals in their true sense. However, what dominates everything else is the sentiment of the small number of players in the market.

In short, meme stock would be any stock that can be artificially manipulated in the trading world. These stocks often find their place in trading-related posts on social media platforms, online discussion forums, news articles, etc., and popular among younger traders.

It will not be entirely correct to assume that all the meme stocks (probably some) are trash, not to forget the GameStop episode in Jan 2021. But, all of them are riding on media attention. These stocks’ attention is often due to their presence in the future relevant industry or a new visionary CEO. The problem with the meme stocks is often that the price changes soon outpace their fundamentals, attributed to two factors – inexpensive trading and online investing groups.

The trading volume explodes due to the social media frenzy. It brings to the forefront the power of the crowd, coupled with unprecedented coordination among the investor’s actions. The undertone behind this phenomenon is the tug of war between small retail investors and big institutional investors, disrupting the power dynamics of the stock market, transitioning the power. It shows the amount of change that can occur when the 99% (small investors) band together against the 1% (institutional players). The belief that till the time like-minded small investors stick together, they’ll be able to protect each other and the stock’s price.

The best game plan for meme stock investing is identifying the difference between deserved hype and hot air.

However, it becomes challenging when the celebrities support these meme stocks. Elon Musk, CEO of Tesla, has become the most significant influencer with his posts on Twitter. Brief History of Elon Musk’s Recent Market-Moving Tweets –  be it “use signal”; “Gamestonk!!”; “Sandstorm is a masterpiece.”; “Ethereum”; “One Word: Doge”; “Dogecoin is the people’s crypto”; “ultimate hodler”; among others. (PS: HODL is not a typo – but means “hold on for dear life” in the crypto space)

This article would be incomplete without the mention of Dogecoin (Shiba Inu), a meme coin. It started as a joke, about a meme, with a dog in it on December 6, 2013. So why are we talking about it when there is Bitcoin, the largest cryptocurrency to discuss?

The main reason is that this meme coin has witnessed a rise of more than 800% in January 2021 in only 24 hours. As a result, it reached the highest price of $ 0.74 on May 7, 2021 (more than 13000% gain in 2021 itself) and was the fourth-largest crypto in terms of market cap.

Source: coinmarketcap.com

Don’t you find it mind-boggling that an eight-year-old Dogecoin is as big as household names like ITC or Ferrari in market cap? Of course, it will be impossible to ignore the rise of cryptocurrencies, which is soon becoming a part of the everyday vocabulary of the millennials and many of the boomers (older generation).

Cryptos are in vogue primarily because of the astronomical rise in their price and their growing utilities. For example, in May 2021, India received a donation of more than 50 trillion Shiba Inu coins. However, it led to a price fall and raised concerns among policymakers, who are already wary of cryptocurrencies. Moreover, there is a lot of skepticism around it in the absence of a stable legal framework in India. Therefore, it is expected that the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, will see the light of the day.

I am sure cryptocurrencies often cross our minds when planning investments. But still, we disregard it either because we think it’s illegal or due to lack of awareness. So at the outset, one should know that cryptocurrencies are not banned as an asset class but as a legal tender. Like all new trends, developments in the crypto space will be a thing to pay attention to and may tempt some to participate in the frenzy, but not blindly.

Therefore, it is a good idea to acquire knowledge before testing the waters.

Another buzzword is NFT, Non-Fungible Token, a new digital asset class that lives in the blockchain ecosystem. NFTs can be anything digital (such as drawings, music, tweet, and much more). Nyan Cat, the First tweet of twitter’s founder – Jack Dorsey – on sale, are a few famous examples of NFTs. The use of technology to sell digital art contributes a lot to the emergence of NFT.

Art as an alternative asset class has often been incorporated into portfolios for diversification because of its low correlation with the equities market. But, the volatility, irrationality, and illiquidity of the art market make it hard to compare with more conventional investments.

As an investment opportunity, NFT, like any other speculative asset, makes sense only when considering its resale value, hoping the price will go up in the future. Thus, the payoff depends on the price you pay to acquire the NFT and how much more you can sell it for if at all you can sell it in the future. Globally, platforms like OpenSea, Rarible, Grimes’ choice, Nifty Gateway, etc. These allow people to buy and sell NFTs.

Unfortunately, this is relatively a new investment avenue with no guidelines on how to value these NFT (how much a meme or a GIF, or a tweet is worth).

So dear investors, maybe it’s time to get acquainted with the new members in the investment world – it may not taste for now, but it’s good to be aware of the season’s flavor. Always invest in what you know, enhance your knowledge, broaden your investment horizon, diversify your portfolio and limit your exposure. Those with a greater risk appetite may consider investing about 2-5% of their portfolio in meme-stocks or meme-coins. They are the future for sure – so may ride on cautiously!

Best Regards

 
Dr. Tarunika Jain Agarwal Ph.D.

Alpha Research