FOMO — The current driver or the financial markets
How Reddit and Twitter became a major player in the money game
Every time you open your news feed nowadays you read about what is going on in the financial markets, how to make the right investment or what to do for your retirement or what to make during lockdown. You read tweets from Elon Musk talking about Dogecoin, /r/wallstreetbets spam about GameStop and diamond hands, and suddenly you realize that there are people making 800% profit overnight on Dogecoin.
You get super excited but then realize that you don’t even have a broker account to invest. You run to your phone and install RobinHood or WealthSimple Trade and put your hard earned money. But by the time it hits the account the trend is gone. All this frenzy about where are bets going next get you hooked into social media and when you realize you are part of a large bull herd under the effect of the Fear of Missing Out — FOMO.
Too much noise, too little information
There are lots of noise out there. You are not sure if you should buy silver, or listen to tweets that are spamming about a meme coin. You open the chart and Dogecoin is up. Everything is up. What should you do. Well, think.
Think about where were you a couple hours ago? Were you in this realm of reading Elon Musk meme tweets that say “Such Doge, much wow!”? When you see the term short-squeeze, do you even know what a short position is? Do you understand what hedge funds do? If you answered no to any of these questions, then my question to you, dear reader, is what are you afraid of? Of every time someone won the lottery you started playing for the fear you were missing out, you would be broke.
Truth be said, most people — and by people I really mean retail investors — that buy Silver, Dogecoin, GameStop and other paraphernalia, have no idea about why they are putting their money there. They are just afraid that they are not on the bandwagon going “to the moon”, as they like to say.
Now, let me pause a moment and state that, there are people that are making money out of it. But these people are normally those that were invested there before the trend happened. People that were already invested in Silver, probably took profits after the raise of prices. One of the investors that stimulated redditors to buy Gamestop had invested in it over a year ago, and went from a couple hundred thousand dollars to 44 million dollars at peak.
Buy high and sell low, or was it the other way?
The real question here is, who is making money out of this frenzy? For sure, not the majority of the people. You have to realize that once the price went up, you should always assume that it will go down. If some big investor decides to sell the majority of their shares or their coins at once, the market will plummet. The logic for this is simple. The price of stocks, like Gamestop, or coins, like Dogecoin, rises because there are more people interested in acquiring it. It is called supply and demand.
An example is: everyone that buys silver put their money in a basket and gets some silver. Whoever gets to choose first gets more, now whoever also gets to put the silver back and get their money after everyone has done that, will also get more money. The concept is: no money is generated, someone has to lose money for other people to win money, much like poker (and the brokerages are the casinos)!
We understand that no money is created in trading, just transferred. But another compelling question is “why are people interested in these investments”? Well, there are a number of factors. In the Gamestop people claimed that they wanted to make Hedge Funds to lose money by performing a short squeeze. In the case of silver, also a short squeeze, which retail traders quickly learned to be a mistake, and, as I mentioned, most people had no idea about what they were doing, see in the image below the spike in searches for the term “short squeeze”
Crypto, and Twitter
In the last few years there were many shady schemes in the cryptocurrency world, including fraud and something called pump and dump. These schemes made many people millionaires, making the “lambo money” — a reference to buying Lamborghinis. It is interesting how similar the pump and dump schemes are to what is happening today. The general idea of the pump and dump was that a group of people with a lot of money would gather and buy a cheap crypto and then spam about the crypto price rising. Retail traders would swarm to buy that crypto and the price would raise even higher. The early investors would then sell they coins to the incoming retail traders, or just dump it in the market. They simply collected the money of the retail traders.
While the example of these schemes might not be the case with dogecoin, there is absolutely no reason why a cryptocurrency like Dogecoin would suddenly get peoples interest. To increase the frenzy, we get pop icons like Elon Musk tweeting about it non-stop, which clearly influences the price changes. It is important to remember that while the CEO of Tesla and SpaceX might mean no harm, he has been fined for tweeting about stocks in the past. And while it might be for the sale of “YOLO”, as the community of retail traders like to say, crypto markets are not regulated and I am pretty confident that he is aware of what he is doing.
Takeaways
You, my dear reader, have nothing to fear. You do not have to follow trends and put yourself in great danger just because some anonymous person on the internet said you should. Think critically and know that, in financial markets, someone has to lose money for the other to make money.
I am not saying that this whole frenzy about buying Bitcoin, Dogecoin, Silver and others is a scheme per se. But if people are putting money in the market because of “Wow”, “Doge” and “Yolo”, they might as well go to a Casino, right!?
I am writing daily knowledge pills so you can keep your knowledge sharp! I write about Data Science, Machine Learning in intersection with Finance. Feel free to connect and check out my other articles!
