For Bitcoin investors it’s a little unsettling but quite comforting too
Photo by Clifford Photography on Unsplash
nless you’ve been hiding under a rock and avoiding the news (not a bad strategy in this day and age), you’ll have heard about recent events in the world of retail stock trading. I’m talking, of course, about the r/WallStreetBets collective and the short-squeeze of ailing computer games retailer GameStop.
Just in case you missed it, a co-ordinated community of retail (i.e., private-individual) stock traders managed to expose frailties in short-selling strategies that are commonly used by hedge funds. The episode and its aftermath have caused significant fractures and highlighted inconsistencies in the financial services establishment.
It seems to me as a novice Bitcoin investor that with the disruption of conventional money markets as has happened this year, the chasm between the conventional world of finance and that of cryptocurrency has closed just a little. The chaos and volatility that most associate with Bitcoin seems to have become commonplace in the regular stock market too.
How it happened
In late January 2021, members of the r/WallStreetBets sub-Reddit group co-ordinated their actions via the social media platform and set out to buy vast numbers of shares in beleaguered companies like GameStop, AMC Cinemas, and Blackberry. Their goal appears to have been to massively-inflate the stock prices through the flood of simultaneous demand created by their buy orders.
In the case of GameStop, this quickly led to a short-squeeze — institutional investors who held significant short positions in such companies (predicting that their share prices would fall in the long term) were forced to buy large volumes of shares to cover their short positions, at the newly inflated price.
Not only did this push the price up further still, increasing the return (on paper) that many of the WallStreetBets group might stand to make, but it also cost the hedge funds dearly in both money and pride.
The effects
In the space of just a few days from 22nd January, as a result of co-ordinated buying by members of WallStreetBets, the price of GameStop shares increased by more than 600%.
The hedge fund Melvin Capital lost more than 53% of its value as a result of GameStop and required a bailout of $2bn from Citadel (another hedge fund) to meet the costs of the shares they had to purchase.
Interestingly, Citadel is one of the firms that receive data regarding trading behaviour from the Robinhood platform — Robinhood was the favoured platform used by many WallStreetBets traders to execute their plan — small, incestuous world, eh?
What happens next?
At the time of writing, the saga is still unfolding.
There have been hints of a sell-off as those who bought into GameStop seek to take profits or get cold feet about holding their position. The mantra of the collective seems to be to buy and hold, increasing the pain felt within the financial establishment for as long as possible.
Bear in mind that many of those investments have sunk their life-savings or college-funds into the venture. They seem jointly motivated by bringing the system to its knees while also making decent returns for themselves. As such, the temptation to ‘blink first’ and liquidate profitable positions must be strong. The ever-present fear of missing out entirely must be even stronger.
There were rumours of a second attempted short-squeeze, this time on silver as a commodity. Its price jumped by 11% in trading on the day. There have since been suggestions that this effort might not have been triggered by the WallStreetBets group at all. Instead, there are hints that it might have been subterfuge or misinformation spread by new members joining the group undercover, from hedge funds perhaps (maybe even from Citadel?).
With talk of lawsuits against Robinhood for discriminating against the little guy (retail traders), bi-partisan politicians from the US Government condemning the inequity, and calls for investigations, regulations, and restrictions, it seems certain that the episode is far from over.
Indeed, it may not even be an episode — what if this chaos and uncertainty is representative of a new normal — a world where financial norms can no longer be trusted or relied upon? After all, so much of the rest of life has been turned on its head since 2020, why not our financial infrastructure too?
The relevance to Bitcoin
It’s now almosta month since I first tentatively entered into the world of Bitcoin and cryptocurrency investing. I knew little about what I was getting involved with, and I understood even less about how it worked. But I’ve been gradually reading, watching, and listening to everything I could find to gain some basic knowledge. I think I'm making progress.
A significant part of a rounded Bitcoin education seems to be about learning to handle the feelings prompted by it and the emotional reactions that are evoked by it, in oneself and in others too.
A monetary system for the anti-establishment
Bitcoin promises a store of value and a digital currency that’s entirely decentralised, free from regulation, and not owned or overseen by any single entity. Bitcoin should be immune to elitism, free from establishment interference, uncontrollable, immutable and sustainable, and secure for as long as computers are networked to each other.
The lack of an elitist controlling force is a compelling feature — consider that the WallStreetBets crew were drawn at least in part by bringing down those who they see as having taken control of the system and manipulated it to favour themselves and their clientele.
I’m not a rebellious guy — I pay my taxes, I stick to the speed limit, and I’m painfully honest. I’m still drawn by the anti-establishment side of Bitcoin — I see it as a positive, not just something to put up with. The reliance on trust, consensus, and equal standards in how it operates seems synonymous with the culture within WallStreetBets.
With that said, as much as I’m drawn to the rebelliousness of Bitcoin, I still pay into a conventional pension via my employer. I put savings into cash and index tracker funds. I’m not prepared to put all my eggs in the Bitcoin basket, and indeed even the most hardened Bitcoiners don’t recommend doing so.
The gray area of finance is expanding
Until recently, the world of finance seemed predictable, stable, and well-established. It was polarised and inequitable too, controlled by the wealthy and favouring them — but at least we knew where we stood.
In the world of conventional finance, things were tightly regulated, governments and central banks were in control, and aside from the occasional scheme or scam, everything ran largely as expected.
Bitcoin represented the anti-establishment — no single entity in control, a world built on clever technology with order maintained through trust, protocols, and everyone playing their part in creating and sustaining the new world order.
With the emergence of WallStreetBets and their exposing of cracks in the conventional finance system, things aren’t as clearly defined any longer. There’s a large grey area in between the two where things are more uncertain and inherently out of control or influence by any central body. The two worlds have intermingled and blended, and it may just be that the key participants need to learn to co-habit and interact with each other.
WallStreetBets may represent a gang of disruptive influences, trying to interfere with the work of the banks and hedge funds, but at the same time, they’re just people trying to make money for themselves too, to better their lives. Many are also crusading on behalf of their parents and members of the last generation who lost it all in the financial crisis of 2008.
The same is true for many who are speculating with Bitcoin. People will argue over whether it is really a currency or whether it was designed and intended to be traded as an asset or not. But Bitcoin investors are all in it in the hope of making money (or at least avoiding the effects of mass inflation).
I’m dutifully only investing what I can afford to lose in case of the (albeit unlikely) complete and total collapse. But I also view it as one of the few possible ways in which I may just get a decent return from an investment? It won’t be life-changing (based on how much Bitcoin I’ve accumulated to-date), but it’s nice to have at least a little money associated with something that could potentially multiply in value many times over if projections are to be believed.
If that makes me a gambler, then so be it. It’s not like I’m staking my pension on Bitcoin. I’d argue that many other investments, particularly those in the style of WallStreetBets and even those managed as part of a hedge-fund, are gambles too, in essence.
Chaos is becoming more commonplace
Chaos and volatility have always been associated with Bitcoin, and its meteoric rises and falls in price are what put many off investing in it and what draw many others to buy it. The volatility is a feature, albeit one that seems to be calming down slightly as the years pass and it becomes more accepted and established.
It’s still subject to outside influences — a few well-chosen words uttered by a billionaire will send the price soaring. Each time it falls, industry commentators are on hand to signal that the end has come for it.
Now we’ve seen that an organised, coordinated, and motivated group of individuals can leverage modern technology to bring about chaos in conventional financial markets too.
Traditional investors bleat that the inflated value of GameStop has nothing to do with its fundamentals and is in conflict with conventional rules that dictate company value — and of course, that’s true. But that the price of a seemingly declining business can be inflated to such an extent through the concerted actions of a few individuals who are playing the system at its own game shows that perhaps fundamentals aren’t so important anymore? At least they’re not all that’s important.
If such tactics can be used regularly, then who knows what chaos could prevail. Volatility could become more commonplace. We could be looking beyond Bloomberg and Reuters for market insight and instead of trawling online forums, message boards, and social media.
Comfortable with uncertainty
I’m buying Bitcoin to hold, a little and often. Each time I go to invest a little more money in it, I feel a familiar sense of anxiety. I watch as the price oscillates wildly and convince myself it’s running away from me. The sums I invest mean that a small variation in price won’t make much difference to how much I get, but I still want to get a good price.
When the price keeps going up, I kid myself I’ve missed the opportunity and fear that it’ll keep climbing forever. When it starts to drop, I hesitate, worrying that it’ll fall further and I’ll miss out on a bargain if I buy too soon.
Such emotions are typical in trading — the psychology of investing is studied and written about almost as much as the economics or technicalities of it.
I can well imagine the extremes of emotion felt by those involved in the GameStop episode in the last few days. For the WallStreetBets community, many investing their life savings out of a commitment to the cause, it must have felt terrifying as they pulled the trigger to buy. As they sit on their holdings resisting the urge to sell, they must feel fearful that they’ll be the last-person-standing, holding shares that are as worthless as they were at the beginning. I’d struggle to sleep at night if it were me.
For the seasoned pros, traders, and fund managers staring into the abyss as the short squeeze loomed, I imagine emotions were similarly severe. Knowing that such an experience could be repeated almost at will and without warning must keep them up at night too.
Perhaps such feelings of uncertainty, fear, and doubt will become more commonplace throughout the world of investing, just as they seem to crop up when it comes to Bitcoin investing?
Maybe those feelings were already commonplace throughout investing? I’d bet that they’re a little worse now, though.
Note: This article is for informational purposes only. It should not be considered Financial or Legal Advice. Consult a financial professional before making any major financial decisions.