What next oh hey super it’s Dogecoin
My model of the GameStop Corp. trade is that it is mostly what I’ve been calling an “honest pump”: People got together on the internet and discussed it, and decided that if they all bought the stock of GameStop at the same time then it would go up and they’d like that. This was correct. There was no fraud or dishonesty involved; that is just a straightforward understanding of how supply and demand work.
Nor was there all that much in the way of fundamental analysis of the underlying cash flows of GameStop’s business. I mean, there was, at some point; lots of Reddit and non-Reddit traders looked at GameStop when it was at $4 or $10 or $20 and said “this should be worth $30.” But once it hit, I don’t know, pick a number, $65.01 on Jan. 22, say, no one was in it for the cash flows. GameStop was worth $200 because more people would buy it and then it would be worth $400; it was a pure social coordination game with no connection to the business of an actual company.
One assumes that this has to end badly for somebody, and indeed a major aspect of the trade was figuring out how it could end badly for somebody else (squeezed short sellers, etc.) rather than you. And of course it does seem to have ended badly for anyone who bought at $400. Still, you could push back on that assumption. Social coordination is actually a pretty big and robust source of value. Bitcoin has been valuable for years now because people on the internet got together and agreed to ascribe value to it; gold has been valuable for millennia for not-too-dissimilar reasons. Society could just evolve in weird ways, who knows, and perhaps GameStop stock will fill some social and monetary function and gain lasting value as a pure token. Last week I imagined a venture capitalist blogging about GameStop in 2027, writing “The thing I like about GameStop is not its underlying cash flows, but the fact that it is a scarce digital store of value.” I was kidding, but one thing that I have learned in recent years is that everything is simultaneously a joke and serious.
Also Elon Musk tweeted about GameStop, and the way finance works now is that things are valuable not based on their cash flows but on their proximity to Elon Musk. A better anthropologist than me should probably take a look at this phenomenon. Musk is the richest person in the world, and in a dynamic, fun, traveling-to-Mars sort of way. It makes sense that his pronouncements have a certain religious character, that his tweets can endow arbitrary objects with mana. If the richest person in the world tweets “Gamestonk!” then I think that means that, if you buy GameStop stock, you will partake in his wealth and dynamism at a remove; you will get rich and have fun doing it. (Not! Investing! Advice!) Maybe that is not how it works on a conscious level—though I think that sometimes it is?—but surely at some subconscious level people want to order their lives in accordance with the cryptic instructions of a charismatic flying zillionaire.
So, “Gamestonk!” And red satin shorts blessed by Musk sell at a huge markup on Ebay. And I have written about Signal Advance Inc., a penny stock that soared 5,100% after Musk tweeted “Use Signal,” about an entirely unrelated app. That stock is still up 350% from where it was before Musk tweeted a month ago. It is an Elon Musk cargo cult; a coordination game—“if we all buy this it will go up, so let’s all buy it”—inspired by an arcane reading of apocryphal Musk scripture.
Also Tesla Inc. stock trades at 1,210 times trailing earnings, is another fact that might be relevant here.
Anyway Dogecoin is up:
Dogecoin, the tongue-in-cheek cryptocurrency featuring a Shiba Inu dog as a mascot, briefly touched a record Monday after billionaire Elon Musk, rapper Snoop Dogg and Kiss bassist Gene Simmons tweeted about it.
The token climbed to a peak of about 8.2 U.S. cents and a market capitalization of $10.5 billion during Asian trading hours Monday before pulling back, according to pricing data from CoinGecko. The coin was ranked among the top 10 cryptocurrencies by market value, the figures showed.
The reckless abandon of the investing world has a new fixation: a cryptocurrency that began in 2013 as a joke, was mostly forgotten, and thanks to a flurry of tweets from Tesla Inc. Chief Executive Elon Musk, is suddenly worth a total of more than $6 billion.
And here is Billy Markus, who built Dogecoin in 2013:
Mr. Markus, who no longer works on dogecoin, couldn’t believe code he wrote in three hours on a Sunday gave rise to a cryptocurrency worth billions of dollars in total market value.
“The idea of dogecoin being worth 8 cents is the same as GameStop being worth $325,” said Mr. Markus, 38 years old. “It doesn’t make sense. It’s super absurd. The coin design was absurd.”
That same article notes: “A vocal group of buyers on Reddit have made it their mantra to push dogecoin to $1.”
Dogecoin is GameStop stripped of all the distracting reality. No one on Reddit is going to publish a due diligence post about how the market undervalues Dogecoin’s cash hoard and customer loyalty. There are no Dogecoin shorts to squeeze, no Dogecoin options market makers to get caught in a gamma trap. The serious arguments for Bitcoin—its algorithmically enforced scarcity, its technological sophistication, its widespread adoption—are also conveniently missing. Dogecoin is just “if we buy this thing it will go up, so let’s buy it; also it will be fun and Elon Musk tweeted about it.”
Look, I understand that I have gotten stupider by typing all of that, and you have gotten stupider by reading it, but it’s gonna get worse. I do think it is pretty obvious that the internet is rewiring social relationships in profound ways, and that we are still in the early stages of that rewiring and the even earlier stages of trying to understand it. Money and value are artifacts of social relationships; why shouldn’t their meaning change as social media warps our brains and our society? Money and value are coordination games; what we use for money depends on the channels that we use to coordinate social activity. Once society was mediated by governments, and we used fiat currency. Now society is mediated by Twitter and Reddit and Elon Musk, so, sure, Dogecoin.
What next oh sorry it’s Bitcoin again
The way finance works now is that things are valuable not based on their cash flows but on their proximity to Elon Musk, so:
Bitcoin surged to an all-time high after Tesla Inc. said it’s invested $1.5 billion, becoming the biggest company yet to back the controversial cryptocurrency.
Bitcoin jumped as much as 15% after Tesla made the disclosure in a regulatory filing, with prices exceeding $44,000 for the first time. Tesla also said it would begin accepting the digital token as a form of payment for its electric cars. …
“The world’s richest man allocating $1.5 billion of his company’s treasury to Bitcoin speaks volumes about the magnitude at which crypto gains institutional adoption,” said Antoni Trenchev, managing partner and co-founder of Nexo in London. “Tesla has now paved the way.”
Here’s Tesla’s 10-K announcing the move. No, uh … no mention of Dogecoin, huh.
Why would you invest (a portion of) your corporate treasury in Bitcoin? One answer is that you have some practical use for it, that your actual business requires censorship-resistant blockchain-based money. That doesn’t seem especially true for Tesla, though it will start trading cars for Bitcoin, so maybe a little.
Another answer is that you want attention, and pivoting from being a boring operating company to an exciting also-holding-some-Bitcoins company will get you media attention and a higher stock price. Obviously this one is true of Tesla, in the sense that Musk requires constant attention to live, and the stock was up this morning. But it is not that true of Tesla, which has a high and volatile stock price already, and doesn’t really need to put money into Bitcoin to attract crypto enthusiasts. As of about 10 a.m. today, Tesla’s stock was up 1.65% on the day; Bitcoin was up more than 13%. Clearly Tesla did more for Bitcoin than Bitcoin did for Tesla.
Another answer is that you are buying Bitcoin as a hedge to something: collapse of fiat currency, inflation, something of that nature. My rough sense is that Tesla is pretty correlated to Bitcoin anyway, in that a future where Bitcoin is valuable is also likely a future where Tesla is valuable, though my model for that correlation is vague, some sort of electricity-plus-being-extremely-online connection. If Tesla wants a hedge, perhaps it should be short Bitcoin. But of course Tesla doesn’t want a hedge; Tesla is all-in on everything all the time, so if I’m right that it’s correlated with Bitcoin then it might as well double down.
Another answer is that you think Bitcoin will go up, and you like to invest your corporate treasury in stuff that goes up. This one seems fine? In general, one thinks of corporate treasury funds as being invested conservatively in cash equivalents so that they’re always there for a rainy day, but if you have a lot of money, or even just a lot of ability to raise money cheaply, I suppose you can be aggressive. Instead of earning roughly nothing in a bank account, your money can earn … well, Bitcoin is up about 50% year-to-date.
Also some of that is probably because Musk has gone around talking and tweeting about it, and because of this announcement today: Musk is in the nice position of being able to spend billions of dollars buying assets in liquid anonymous markets, and then make those assets go up just by tweeting about them. If you can do that, you should! If you can buy a thing secretly, announce “I own the thing,” reliably cause the thing’s price to go up a lot, and then—if you want—sell the thing secretly, then that’s a great business right there. Talk about clean energy; that’s a perpetual motion machine.
This is nothing new—this is, like, half the explanation of how Warren Buffett works—but it continues to be very nice work if you can get it. (You can’t, though; possibly the way to get it is by first becoming the richest person in the world.) Ordinarily Elon Musk does not do too much of this, possibly because he can also make the price of Tesla stock go up or down by tweeting about it, so if he needs money, telling people “buy Tesla” and then selling some shares is more straightforward than putting his stamp of approval on things he doesn’t control. Still it would be funny if he did more of it. If Tesla announced that it had bought $10 million of Dogecoin, Dogecoin really would go to a dollar, which would be free money for Tesla.
By the way, the corporate accounting for Bitcoin is kind of bizarre. From the 10-K:
We will account for digital assets as indefinite-lived intangible assets in accordance with ASC 350, Intangibles–Goodwill and Other. The digital assets are initially recorded at cost and are subsequently remeasured on the consolidated balance sheet at cost, net of any impairment losses incurred since acquisition. We will perform an analysis each quarter to identify impairment. If the carrying value of the digital asset exceeds the fair value based on the lowest price quoted in the active exchanges during the period, we will recognize an impairment loss equal to the difference in the consolidated statement of operations.
The cost basis of the digital assets will not be adjusted upward for any subsequent increases in their quoted prices on the active exchanges. Gains (if any) will not be recorded until realized upon sale.
As an accounting matter, your Bitcoins can lose value, but never gain (until you sell them). If you run, you know, a normal company that is valued on its earnings, this might make Bitcoin unattractive.
How’s GameStop doing?
No one is looking forward to getting back to, like, manufactured defaults to trigger credit default swap payouts more than I am, believe me. But GameStop Corp. (GME) common stock closed on Friday at $63.77, up 19.2% on the day. It opened above $72 this morning, but was down a bit—around $61—as of about 11 a.m.
I keep waiting for the articles about the people who bought GameStop and lost their houses. A lot of people bought GameStop. The WallStreetBets subreddit that pumped it currently has 8.7 million members, roughly half of whom joined during the one-week period when GameStop traded above $100 a share. A lot of the discussion of the trade has a political valence, about the little guy rising up to take on Wall Street at their own game. Surely reporters want to write stories about some of those little guys losing their houses. Those are just the stories you read after a bubble pops, after a trade goes wrong. There are millions of little guys in this trade, surely many of them sitting on losses, and if any of them are ruined they can definitely get a newspaper article out of it.
So far though I don’t think they’ve found anyone? Here’s the New York Times with “The Hopes That Rose and Fell With GameStop”:
Some wanted to be on the front lines of a revolution. Some wanted to be rich. And by the end of a wild two-week ride where fortunes were made and lost, some just hoped they’d be able to pay their rent.
But here’s the actual story of the rent guy:
Mr. Jones, a college student from Kenosha, Wis., bought $300 in shares of AMC, the movie theater chain whose stock was also swept up in the attempt to squeeze the short sellers who profit as stocks decline.
“I just got caught up in the social media hype and just dove right into it,” he said. “I fell for it.”
When AMC started to fall and he had lost $112, Mr. Jones, 24, panicked.
“I just had to get out of there as soon as possible,” he said. “It’s a lot of money, we’re in the middle of a pandemic and I have rent that needs to be paid.”
He lost $112, not on GameStop, and there’s no indication he’ll have any problem with his rent. There are more stories in the article, and they are mostly … reassuring? It’s people who took some money that they could afford to gamble, gambled it, and kind of got their money’s worth. Here, for instance, is a teen who invested “$1,035 — about a month’s wages from his job at a pizza shop and his freelance photography business — when GameStop was trading at $290,” lost most of his money, and is still holding:
“I’ve come to terms with the fact that I’ve already lost the money,” he said. “Realistically, the stock is not going to go where it was before.”
But the losses are an investment, too, Mr. Chalfant said. They’ve earned him “internet points” on WallStreetBets. “If you’re saying, ‘I’m still holding,’ you have more clout than if you didn’t,” he said.
That strikes me as a completely correct analysis: There is an internet community that you can join by, essentially, losing money by buying GameStop at the top, and that community is pretty fun, so bored suburban teenagers are using their pizza money to join it.
There are going to be hearings about this, and they’re going to be pretty painful, but I think this is basically right:
Oversight committees in the Senate and House announced hearings, the Securities and Exchange Commission vowed to root out any wrongdoing and the Treasury Department convened a meeting of top financial regulators to discuss the volatility.
Barring evidence that people were trying to manipulate the market, regulators may not have much to do. One of the core principles of market regulation in the U.S. is transparency—give investors information and let them decide. The GameStop drama was nothing if not transparent.
“You can sell garbage to the public as long as you say to the public, ‘This is garbage and you’d be an idiot to buy it, but would you like to buy it?’” said Harvey Pitt, a former SEC chairman.
What appears to have happened in recent weeks is that a massive wave of retail investors answered, “Yes,” to that question, current and former policy makers say.
If Congress could call a bunch of witnesses to say “I was deceived by evil Wall Street banks into putting my life savings into GameStop, and I lost everything,” they absolutely would, and then Something Would Be Done About It. But instead the witnesses are all going to be like “yeah I couldn’t see my friends so I got really into Reddit and we thought it’d be funny to spend our pizza money buying GameStop at dumb prices, and honestly it was.” It’s hard to regulate that.
What is a “short ladder attack”?
Nothing, it’s nothing, it’s a fake thing, it’s nonsense, I’m linking to an explanation here so that later when people email me to ask about it I can say “I already told you this was fake.” It seems to have become popular on Reddit as an explanation of why GameStop’s stock went down. The basic idea of a “short ladder attack” is that a short seller sells stock to another short seller, who sells it back to the first at a lower price, who sells it back to the second at an even lower price, etc., until the price goes down a lot and they both cackle with glee at the trick they’ve pulled off. In an illiquid stock I suppose this could have an effect, and this sort of thing—“painting the tape,” “wash trading”—is a real enough form of penny-stock manipulation. In, you know, the most liquid stock in the world, as GameStop sometimes is these days, this is not even worth discussing.
Other problems related to short selling—short squeezes, naked shorting, “short-and-distort” attacks—have more basis in reality, but they share the characteristic that, if you are reading about them, there is a very high likelihood that what you are reading is crazy. There are measured, empirically grounded articles and enforcement actions about naked shorting, but they are vastly outnumbered by financially illiterate conspiracy theorizing about it. People really do not like short selling.
Elsewhere here is a New York Times article about how short sellers are sad because people don’t like them, and about how regulators might use the GameStop situation as an excuse to crack down on short sellers. Which does seem a little unfair? Short sellers got absolutely smoked on GameStop because people on Reddit decided to gang up on them, and now they’re the ones who get in trouble?
BofA Divided as Bankers Cry Foul Over Special Bonus Treatment. Renaissance Clients Pull Out After Firm’s Rotten Run of Results. Reddit-led market turmoil hits big quant hedge funds. SoftBank’s Vision Fund posts best quarter since launch in 2017. Oil’s Remarkable Rebound From a Year of Catastrophe. Defending Shorts, Hindenburg Takes on Palihapitiya’s Clover. Elliott Management Explores Raising a SPAC. Clawbacks Are Hard, So Companies Try Postponing Pay Instead. Dating App Bumble Boosts IPO Fundraising Target to $1.8 Billion. Reddit Super Bowl ad. De Cecco Finally Reveals What the Heck Is Going On With Its Bucatini. New blue dropped. “Bull or bear, that’s the question.”
 Maddeningly, people continue to think that it is somehow illegal insider trading? “You bought a thing without telling anyone, and then you told people that you liked the thing and it went up, that’s illegal.” I don’t even understand that intuition. No! You can trade when you know your own intentions, even when nobody else does! Also, man, it’s Bitcoin, there’s no such thing as insider trading. This footnote is especially not legal advice.
 That sentence is especially not investing advice.
 WallStreetBets hit 3 million users on the morning of Jan. 27, and 6 million on Jan. 29, meaning that it added 3 million users during that period of Jan. 27 to Jan. 29 when the stock hit its peak. Add in Jan. 26 (when it closed at $147.98), the weekend, and Feb. 1 (when it closed at $225) and I figure you’re over half of the current members.
 Or on a bigger, stranger scale, this article describes a Reddit poster who “showed The Washington Post an image indicating roughly $400,000 in potential GameStop losses from the day but insisted he would not sell.” “He said he has ‘been poor for too long’ and works ‘a god awful amount of hours for a garbage company’ and sees betting on popular ‘meme stocks’ as a way to potentially strike it big. … ‘I’m slightly agitated, but in the end, its just a gamble and Im willing to risk it all,’ he wrote.” He’s “poor,” but had $400,000 to sink into “just a gamble.” I don’t know what to make of this but my guess is he’s not losing his house.