Gamified Financial World

Launched on the AppStore in December 2014, Robinhood’s mission is to “democratize finance for all.” The company introduced zero-commission transactions and relatively low account minimums to lure users who were too expensive and cumbersome with traditional financial institutions. The gamble was almost unbelievably successful — Robinhood was valued at more than $1 billion within two years, and other brokers were forced to slash their commissions to compete. Today, Robinhood has more than 22 million funded accounts and nearly 19 million monthly active users.

Due to increased social media usage and increased access to the financial world, investing and trading communities have sprung up on various social media networks: Fintwit (financial Twitter), content creators on YouTube and the now-famous Reddit community (such as the WallStreetBets retail community of stocks). People share investment ideas, discuss recent market moves, and post about their incredible gains or devastating losses. The rise of the crypto economy has also increased the speculative enthusiasm of the entire digital community, while corporate giants like Elon Musk have become social media stars. The pandemic has caused extreme market changes while leaving many people bored, alone and with too much time on their hands, which has only accelerated the growth of the online financial community.

All of this culminated in January 2021, when struggling video game retail company GameStop took the spotlight in the financial world. The story goes that the hedge fund shorted the stock — borrowed the stock and sold it immediately, betting that GameStop’s stock price would fall. Users of WallStreetBets see extremely high levels of short interest (more shares sold short than existing shares) as an opportunity. If they can push the price of GameStop stock higher, short sellers will have to buy at a higher price to cover their heavily lost positions. As a result, they bought GameStop in bulk, causing its price to skyrocket, and Wall Street hedge funds bet on the company. Shares of GameStop rose from $20 before the squeeze to nearly $500, and after its success, traders turned to other stocks with a lot of short interest (like troubled movie theater company AMC). Until Robinhood and other brokerages completely suspended trading in GameStop, AMC, and several other “meme stocks” — effectively cutting off the momentum of the meme mania.

But it’s just a story – to tell the story of this story, we have to start from the beginning.

democratization of finance

“Because of the effect of attention on buying and selling behavior, the technological advantages that investors are able to unite through easy-to-use apps appear to make profitable day trading more difficult, not easier.”

For the vast majority of people, trading is a money-losing proposition. Decades of academic research has shown that retail investors trying to pick their own stocks lag risk-appropriate benchmarks, while those who trade regularly do worse. This should come as no surprise – professional fund managers have consistently underperformed the index, so why are ordinary people able to outperform? The essence of the efficient market hypothesis is that investors cannot obtain reliable alpha (alpha refers to earning a super high rate of return) because asset prices reflect all relevant available information. Real-world markets cannot be fully efficient, but they are close enough that alpha is often difficult to obtain. Those who have outperformed the major indexes often do so because they took on additional risk (like Warren Buffett’s value investing), mined new information (like Renaissance Technologies’ famous Medallion fund), or just got lucky.

Robinhood came at a time when low-cost passive index funds were taking the financial world by storm. The relative underperformance of expensive actively managed funds and the rise of low-cost index fund providers such as Vanguard have led to trillions of dollars in daily retirement savings pouring into index funds. Robinhood’s mission is to break down the last barriers in the financial world for ordinary people: high transaction costs and opening brokerage accounts. Traditional brokerages have no interest in managing millions of accounts at $500 each, so focus only on a small group of high-net-worth individuals. Many brokerages are clunky and charge high fees per trade, making them unusable for young, tech-savvy, and low-net-worth users.

“A big part of the appeal isn’t that ‘financial is fun,’ it’s that trading stocks or cryptocurrencies seems like an easy way to make money. Obviously, I don’t think that’s true. “Srivatsan Prakash (Market Champions podcast host)

However, the introduction of brokerage into smartphones is starting to undercut the trend of passive investing, with those who trade on their phones more likely to buy riskier, popular and lottery-like assets. They are also more likely to chase past returns and succumb to well-known behavioral biases that hinder investor performance. The effects also may not be temporary — investors who started trading by phone are starting to exhibit similar behavior on other platforms. Robinhood currently has 18.9 million monthly active users out of 22.4 million total funded accounts, which means that most users check their accounts frequently – which also reduces long-term returns. For many, active trading is starting to become more Attractive – they can get rich quick this way too.

Gamified Financial World

Over time, users of zero-cost brokers began to switch to riskier and more volatile financial products. Put and call options are high-risk financial derivatives commonly used for hedging and are increasingly used by retail traders to make leveraged bets on the movement of different stocks. The explosion of meme coins has accompanied an already volatile cryptocurrency market. Crucially, Robinhood earns a portion of its funds through Payments for Order Flow (PFOF), and market makers compensate brokers for how they direct trades. The process is legal, improves upon the high transaction fees of a bygone era, and may be cheaper for users than other options, but it still gives Robinhood an incentive to make users trade as often as possible and trade as market makers are willing to Pay more to trade riskier, less liquid assets. Last quarter (Q4 2021), $164 million of Robinhood’s trading-based revenue came from options, another $51 million from cryptocurrencies, and $50 million from common stocks.

financial memes

“Society has always been a meme war, but before that it was fought with sticks and stones. Yet the internet has gone into an arms race, trench warfare with meme-driven brains in many areas. They haven’t caught all the realm of thought, but I fear the meme gap will only widen.”

CGP Grey, meme commentary answers. CGP Grey is YouTube’s 5.2 million+ educational blogger.

With the rise of retail investing and the popularity of social media, corporate executives and high-profile investors became social media stars (and to a lesser extent, and vice versa). Elon Musk, Tesla’s Technoking (Techno is the electronic music genre, which is his official title), is without a doubt the biggest star in the financial social media world, with a staggering 71 million Twitter followers.

“The way finance works now is that things are valued not based on their cash flow, but on how close they are to Elon Musk.”

Matt Levine (Valuation Analyst) Elon Musk’s Market Hypothesis

Elon’s social media status has made him a market mover throughout the world of traditional and crypto finance, and his tweets about GameStop, Dogecoin, Bitcoin, and his own company Tesla elicited a huge, instant reaction from the financial markets . Many crypto projects were created to match Elon’s stated intentions on Twitter, and CEOs of other public companies tried to connect themselves to Elon’s social media fame as much as possible.

Gamified Financial World

Elon Musk has used his social media fame to attract a highly loyal group of retail investors and use these loyal retail investors to achieve business success in a virtuous cycle. Tesla is a nearly $1 trillion company today, but it trades at a very high price-to-earnings ratio of around 270. By comparison, at the time of writing, Apple trades at a measly 28 times earnings, making Tesla a very competitive company. Companies that are valuable relative to profitability. That partly reflects high growth expectations, but partly Elon’s unique ability to attract retail investor capital at sky-high prices. Tesla’s shares rose after its December 2020 offering, the third time that year that the company raised money at a higher valuation than it is today. Elon was able to use the cheap money to quickly scale up actual production and use his social media fame to boost Tesla’s brand image and visibility.

Gamified Financial World

Retail traders are emotionally attached to Tesla’s success thanks to their ties to Elon Musk’s quasi-social (i.e., one-sided relationship between media users and media characters’ participation). Their emotional connection makes them stickier investors and willing to buy Tesla stock at a high valuation. Seeing this, other corporate executives and fund managers started building their social media followings on social media. Microstrategy Inc’s Michael Saylor (Michael Saylor) built a following based on his company’s purchase of Bitcoin, Cathie Wood (Miss Wood) built a following based on her “disruptive” investment fund, Chamath Palihapitiya (SocialCapital CEO) through the use of special Special Purpose Acquisition Companies take private technology companies public to build a following (SPAC).

“As young people, part of our reaction meme is everything, so I wouldn’t be surprised if this does become an investment style.” Kyla Scanlon (Twitter KOL)

The beauty and curse of social media is its ability to create narrative communities and quasi-social relationships. Humans are narrative, social, and tribal creatures; we form communities according to in-groups and out-groups, and learn from the stories that members of our groups tell us. Memes are not just funny pictures, but short expressions of any complex idea that can be shared, imitated, and adaptable—they are the lifeblood of narrative communication on the Internet. An effective meme defines an in-group and an out-group simply by who gets the joke (hence who the social media content delivery algorithm will show the joke to), and conveys complex ideas via familiar templates (think how many people there are) Use the famous “distracted boyfriend meme” to comment on various situations). Consider the recent crypto memes of WAGMI (We’ll All Succeed) and NGMI (Won’t Succeed). They clearly define an ingroup (“we” who invest in cryptocurrencies or a specific coin/project), an outgroup (“you” who are not invested), and tell a narrative story about both groups (whether you Will “achieve it financially or socially, depending on their relationship to the coin/item (implying a substantial increase in future value).

Gamified Financial World

The social media narrative underlies the explosion in SPAC usage over the past few years. In a SPAC, a shell company is listed on a stock exchange in order to finance a merger or acquisition of a privately held company. Because SPAC (listing financing method integrates the characteristics and purposes of financial products such as direct listing, overseas mergers and acquisitions, reverse mergers, private placements, etc., and optimizes the characteristics of each financial product to complete the purpose of corporate listing and financing.) There is no real subsidiary company. They launched in 2016 and had to find acquisition targets, so they relied on investors’ trust in the SPAC founders to raise capital. In the age of social media, people with large and loyal digital followings (such as Chamath Palihapitiya) can leverage their quasi-social relationships with fans to generate substantial funding for SPACs based solely on ideas and narratives.

Online communities are formed through constant exposure to memes that convey similar narratives. Eventually they start to catalyze themselves. The growing popularity of memes has prompted previously uninterested people to get involved in the community. These people were so convinced of the core principles that the community defined their beliefs that they started creating and sharing more memes. The memes convince more people who weren’t interested before to get involved, and the cycle starts again. This brings us back to GameStop and WallStreetBets.

Financial gamification

Gamified Financial World

WallStreetBets expanded dramatically in the early days of the pandemic as COVID-induced unprecedented volatility in the stock market left stranded high-income earners with time and money to sit idle. It shouldn’t be forgotten that the subreddit also attracts many desperate people looking for ways to improve their finances, and many who have lost their social interaction during the pandemic and seek a sense of community, the subreddit is swept away by traders who are betting everything on risky trades Notorious for either winning a lot of money or (more likely) losing all of it.

“Our brains are still adjusting to this online space, and the way they deal with loneliness is through the ‘Man, all I do is talk to people on Zoom all day’. ” Cool Scanlon

In late 2020 and early 2021, part of Reddit’s WallStreetBets community started following GameStop. The company appears to be making some important changes to the company’s organization and strategy in response to years of declining profits, and users of WallStreetBets (a community of retail investors in stocks) see the company’s record short interest as an opportunity. They started pouring money into company stock, trying to squeeze out short sellers, and the rest is history.

Gamified Financial World

At the height of the mania, more than 750,000 individual accounts were trading GameStop, drawn in by narratives (memes) that they were sticking to hedge funds by buying stocks. If retail traders just push prices high enough, they can destroy Wall Street suits in one fell swoop and make their own fortunes at the same time. The meme started on WallStreetBets, but it went viral: first on the rest of Reddit, then on Twitter and other social media platforms, then on TV and mainstream media, then on the dinner tables of millions of Americans, and finally to the halls of Congress and the White House. Social media influencers like Elon Musk took the meme further, amplifying its reach by attaching their influence to the craze, and the meme spread to other company stocks – AMC, BlackBerry, and others with plenty of Struggling retailers with short interest.

“Whether it’s driven by a desire to squeeze short sellers to profit from price increases, or driven by belief in GameStop’s fundamentals, it’s positive sentiment that sustains the price for weeks, not a buy-covering GameStop The appreciation of stocks.” SEC Staff Report on the State of the Equity and Options Market Structure in Early 2021

The beauty of social media is its ability to create narrative communities and quasi-social relationships. The curse of social media is that these narratives don’t have to be fact-based, and these communities can be led astray by groupthink in-group and out-group dynamics. The GameStop saga identified a definite inner group — an online community of forgotten ordinary Americans — and a definite outer group — hollowing out the country’s Wall Street suit. It establishes a clear narrative: By buying GameStop stock, you’re sticking it to the hedge fund outgroup and enriching the online ingroup, a meme that has caused GameStop’s price to squeeze a lot of shorts.

Gamified Financial World

In fact, a Securities and Exchange Commission (SEC) report released after the GameStop incident showed that short sellers bought a small percentage of the total, and that most short sellers were long before GameStop hit its peak price. It capitulated, and retail (retail) buying drove GameStop’s stock price to an all-time high, with additional push from some institutions. The short squeeze wasn’t the driver of GameStop’s price increase, but a flood of retail investors that pushed the stock higher. Crucially, continued interest from retail traders has kept GameStop’s shares so high — as of this writing, the company is trading at four times pre-mania levels and nearly twenty times pre-pandemic levels .

“One of the main drivers of the GameStop squeeze was the bulk buying of call options, which caused market makers to hedge their call option holdings by buying the underlying stock, pushing up the stock price. Although the staff did find GME options trades for individual clients Volume increased significantly, from $58.5 million on Jan. 21 to $563.4 million on Jan. 22, until it peaked at $2.4 billion on Jan. 27, but the growth in options volume was driven primarily by buying puts, not Call options. In addition, data shows that market makers are buying rather than selling call options, observations that are themselves inconsistent with the GameStop squeeze.” SEC staff report on the state of equity and options market structure in early 2021

Just to dispel other myths, GameStop compression isn’t the cause of GameStop mania either. A GameStop squeeze is slightly more complicated than a short squeeze, but essentially involves a trader buying a call option (a bet on the underlying asset’s price) from a market maker, thereby forcing the market maker to buy the underlying asset to hedge the call options they wrote. . When buying the underlying asset, market makers push prices higher, so retail traders buy enough call options to push prices higher. This would force short sellers to buy the underlying asset to hedge their positions, pushing prices higher. However, retail traders are net buyers of puts and market makers are net buyers of calls — a situation that is inconsistent with the GameStop squeeze.

In the end, there was no conspiracy by hedge funds or other financial institutions to sabotage the GameStop saga. When Robinhood and other brokers suspended trading in meme (in this case, GameStop) stocks, it wasn’t about protecting the bottom lines of financial institutions that suffered from the squeeze. Instead, extreme volatility forced the clearinghouse to demand large deposits from Robinhood to cover settlement periods for meme stock trades. Deposits were ten times what Robinhood’s normal levels were, and the company simply couldn’t pay them immediately.

“When a naked short sale occurs, the seller fails to deliver the security to the buyer, and staff do observe a spike in GME failure to deliver. However, failure to deliver can occur with either a short or a long sale, making it a naked short sale Imperfect measure. Furthermore, based on staff review of available data, GME has not experienced persistent non-delivery at the individual clearing member level. Specifically, staff observed that most clearing members were able to relatively quickly Clear any failures, i.e. within a few days, and most have not experienced multi-day failures.” SEC Staff Report on the State of Equity and Options Market Structure in Early 2021

There is also no conspiracy around non-delivery, which occurs when one party in a deal contract fails to meet its obligations, and the conspiracy around GameStop where short sellers fail to deliver when closing positions, partially destroying shorts extrusion. But the vast majority of non-delivery issues were quickly resolved, and after the initial market turmoil, delivery failures fell sharply.

This seems like a lot of ink to debunk some of the false theories surrounding GameStop mania, but it’s necessary to dispel the common narrative that underlies a fundamental misunderstanding of the whole situation. The GameStop saga isn’t about selling short or sticking it to Wall Street — it’s about millions of people being persuaded by a meme on the Internet to gamble with their meager money on the stock of a dying video game retailer. Wall Street won because while a handful of hedge funds suffered huge losses, brokerages, market makers, asset managers and other large financial institutions profited handsomely from the rise in trading volumes. Retail investors lost money on increased trading volume — reducing returns — and were drawn to extremely risky assets by the buzz on social media.

In the end, what matters is what people think, not the actual facts. As long as people think it’s “retail versus institutions,” they don’t think too much of the facts.

Srivatsan Prakash

Crucially, GameStop’s story doesn’t end when it disappears from the public eye in early 2021. WallStreetBets had fewer than 2 million subscribers as of January 2021, and has since grown to nearly 12 million. GameStop and AMC’s subreddits “Superstonk” and “AMCstock” rose to 730,000 and 450,000 subscribers, respectively. Their front pages often contain posts predicting a total financial market meltdown, the mother of all short squeezes (MOASS – another meme), and a rapid rise in GameStop/AMC stock prices. They often promote conspiracy theories about financial firms, the Federal Reserve, and media organizations. It’s this highly focused niche internet community and the memes it believes keep GameStop’s stock high. Crucially, they are a community of loners—there are discussion threads, and this winter, Superstonk even donated more than $100,000 to the charity Toys for Tots together.

When WallStreetBets’ subscribers went from 2 million to 9 million almost overnight, most new subscribers didn’t realize what was right and what was wrong. They’re just from Twitter or Instagram, usually inspired by meme pages or their friends. These are the people I worry about.

Taylor Shiroff

Fundamentally, these people are victims of self-catalyzing, isolated internet communities in which users encourage each other and gamble on extremely speculative investments to their own detriment.

in conclusion

“The market is no longer driven by fundamentals, but by memes. No longer a metaphor, but a living structure — the market.” Kyla Scanlon

Many people think that a single event — like a market crash, recession, or the end of a pandemic — will bring the meme-trading frenzy to an end, and I basically don’t see it that way. The main drivers of meme trading are the sociological forces and increased access to financial markets brought about by the age of social media. These processes were accelerated by the economic forces of the pandemic era, but had already begun before the pandemic. As the digital age progresses, corporate social media stars, online trading communities and increasing access to financial services will become increasingly important. The meme-trading frenzy isn’t going away, it’s just moving from asset to asset and platform to platform, looking for another narrative to grab onto. Even the meme itself is dedicated to getting traders involved in the frenzy. “HODL” and “Diamond Hands” are very popular memes for holding financial assets despite their volatility in value. Exiting can be very difficult when both the people you have quasi-social relationships with and the online communities you frequent are constantly encouraging you to trade.

Gamified Financial World

I also don’t think the meme stock mania has fundamentally disrupted the normal functioning of the financial markets as a whole, and while there is some evidence that Robinhood day traders cause additional volatility in the tickers they follow, retail traders account for only one percent of total trading volume. small portion. Although margin debt is at an all-time high, it still represents a normal percentage of overall market value. The main victims of the retail trading craze are the traders themselves, who may suffer lower returns due to their trading behavior.

“It should be considered whether game-like features and celebratory animations that may be designed to generate positive feedback from trades will lead to more trades by investors. Additionally, order flow payments and the incentives they generate may prompt broker-dealers to find an increase in New ways for clients to trade, including through the use of digital engagement practices.” SEC Staff Report on the State of Equity and Options Market Structure in Early 2021

There are two main beneficiaries of this retail trading boom, the first being that financial institutions are deploying behavioral boosting and gamification to encourage more trading among their user bases. Retail investors have more money in their pockets per trade, and the more risky the trade, the more money they make.

The second beneficiary is the people who shape social media narratives – for lack of a better term – creating memes. Their ability to channel retail investor capital will become an increasingly important part of future corporate and fund strategies. The quasi-social relationships they develop with their audiences give them the unique ability to leverage cheap capital to influence outcomes in the real economy—while enriching themselves.

In the age of social media, it’s important to remember that you’re not immune to publicity. In this context, propaganda means not just a political movement, but any information that promotes a particular narrative. The narrative formed on Twitter or Facebook may not be a top-down strategy for shaping public opinion, but the flow of information from content delivery algorithms is still shaped and shaped by the opinions of its users—whether those opinions are true or not. Some memes are harmless, but others are deadly — and in a competitive attention economy, it’s increasingly difficult to distinguish between the two. The natural tribalism of the human mind means that propaganda in the age of social media is created in extremely fragmented ways. There are millions of small communities with their own in-groups and out-groups that compete with each other to control the narrative. All social media influencers — yes, that includes me — have biases, shortcomings, and incentives that make them not entirely trustworthy institutions. The only way to stay safe in the modern age is to confront your own biases and sensitivities while constantly challenging your sources of information.

The information provided herein is for general guidance and informational purposes only. The content of this article should under no circumstances be considered investment, business, legal or tax advice. We are not responsible for personal decisions made based on this article and we strongly recommend that you do your own research before taking any action. While every effort has been made to ensure that all information provided herein is accurate and up-to-date, omissions or errors may occur.

Posted by:CoinYuppie,Reprinted with attribution to:
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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