The Memeatic Economy
Right now, we can see this through fast-acting Reddit swarms versus reactionary forces. Earlier this week, a friend messaged me about a bot he built to follow an index of meme stocks. A few days later, the French Wall Street Bets finance revolution of retail investors reached a frenzy.
Chaos, or deterministic chaos in this case, is a simple but nonlinear rule that generates random and unpredictable behaviour. In the long term, this behaviour is difficult or impossible to predict. Consider for example, a double pendulum, each pendulum affects the other’s movement and makes it challenging to predict the pendulums’ movement.
In the second law of thermodynamics, the level of disorder in the universe is said to be steadily increasing. Systems move from ordered to more random behaviours. The net entropy of a closed system either increases or stays steady. As the entropy increases, there is an emergent complexity curve in a parabolic manner of increase and subsequent decrease.
Platforms act as reactionary forces for any chaos that arises. Whether this be on Discord, Reddit, Twitter or Robinhood. In this week’s case, Robinhood (the ‘Sheriff of Nottingham’) and their investor backers Melvin Capital, sought to control the chaos of the Internet swarm that looked to exploit and financially destroy the U.S. brick and mortar video game store, GameStop.
Under normal circumstances, control is an invisible guiding hand on how players can interact. Under a crisis/disorder/rebellion case, platforms must take more overt moves to enforce control. Exercising this power is autocratic in nature and ignites disorder through ranks of groups who either support or rebel against the guiding hand.
Control and chaos swing in a pendulum, until a steady state equilibrium is reached.
Meme stocks (stocks that are popular due to high sentiment rather than financial balance sheet) shot up massively this week due to a subreddit Wall Street Bets. The primary company, GameStop (NYSE: GME) ended Friday on a price of $325. A 1900% increase from the start of the month.
The story is awaiting a Michael Lewis tale…
Back in September 2019, a user named DeepF*ckingValue aka (YouTube user ‘Roaring Kitty’ who transformed his $53,000 investment in GME into $48 million) posted on r/wallstreetbets ‘Hey Burry thanks a lot for jacking up my cost basis’ and a table of his long-dated calls on GME. Every month since, he posted his “YOLO GME” position.
Since the 2014 Financial Year and until the 2019 Financial Year, GameStop had been making modest profits.
Some hedge funds, namely Melvin Capital began shorting positions on GameStop. This meant that they were borrowing stock to sell it on the market in the expectation that prices would go down so that they could buy at a lower price to return the borrowed shares and pocket the price difference.
The short interest was 140% of total shares (and a lot more given that not all shares are actively traded). More people started to take notice of DeepFuckingValue’s post and more people followed him in buying into GameStop stock and options. The subsequent increase in prices and eventual need for hedge funds like Melvin Capital to repay meant a massive increase of price to buy the stock and/or super high borrower fee. It eventually led to Melvin Capital closing its position after a $3.75 billion loss and requiring a cash injection from its larger rivals Citadel and Point72.
Only time will tell as to whether the meme stocks, GME, AMC, BB will be able to issue new shares like Tesla and raise a few billion dollars of capital in GME’s case to re-invest in its business.
However, Reddit and social media once again shows the power of the internet herd. The networks are like a hedge fund dinner with 2 million guests. One person helping the charge, YouTube user ‘Roaring Kitty’ got the crowd going into $GME resulting in his $53,000 investment turning into $48 million.