This article originally appeared in the South China Morning Post
Retail traders were seen as emotional, unsophisticated and, when up against institutional investors, at a structural disadvantage. That is, until they banded together in the thousands and decided to take a stand against Wall Street.
The hype in relation to the GameStop saga has died down somewhat. It is still worth reflecting on, though, because it signals an important transformation in market psychology and might have great implications for the months and years to come – in particular, for bitcoin and decentralised finance.
In January, members of Reddit group WallStreetBets, known for their aggressive trading strategies, were able to push up the price of GameStop by more than 8,000 per cent from May 2020.
In a concerted effort that involved thousands of retail traders, the collective was able squeeze hedge funds out of their short positions, with Melvin Capital reportedly losing more than US$3 billion. If not for trading apps such as RobinHood disabling the buy function while institutions were still able to trade, the rally could have continued for longer.
What mainstream media and financial commentators failed to see was that WallStreetBets was operating on a different set of fundamentals. This was not about balance sheets and cash flow but rather community and financial agency. It was about demanding a fair and free marketplace.
It was also about identity, as expressed in an open letter by one of the WallStreetBets members to Wall Street and CNBC:
“I own GameStop not because Diamond Hands. I own GameStop because I AM GameStop. I am choosing to invest in my generation, and selling would be selling myself out.”
While the commotion has subsided somewhat, with GameStop trading around US$50, the story is far from over. During the past few months, in the context of bitcoin rising to US$45,000 per unit, up from less than US$5,400 in March 2020, much attention has focused on the entry of institutional and corporate investors into the market.
Bitcoin has its roots in retail, and in this instance the institutions are somewhat disadvantaged. Unlike private individuals, institutional investors cannot purchase bitcoin the same way retail investors can. They must do so on platforms that meet regulatory requirements and report their holdings, and funds are usually placed with a third-party custodian. Additionally, asset management firms in the US are bound by certain volatility restrictions on their portfolio, which means their exposure to bitcoin is usually limited.
In recent months, investors such as Paul Tudor Jones, Harvard University, Square and MicroStrategy have invested in bitcoin as a hedge against inflation. Tesla announced it had bought US$1.5 billion worth of bitcoin, explaining it did so for “more flexibility to further diversify and maximise returns on our cash”. Bitcoin is everything WallStreetBets was looking for in GameStop. It belongs to a new generation of digital natives who value bitcoin for what it brings them in terms of community, financial agency and identity. Unlike fiat currencies which are printed on demand and see dilution whenever such printing occurs, bitcoin cannot be manipulated, copied or diluted. It is not controlled by any country or any one entity. Unlike with GameStop, the market for bitcoin cannot be halted – it runs 24/7.
Now, it is easy to convert cash to bitcoin online via merchants, on exchanges and soon even via platforms such as PayPal. Bitcoin can be held in private wallets, in mobile apps, in an external storage device, on an exchange to collect interest, in cryptic text on a piece of paper or even simply in one’s memory if one was so daring. Any amount of value can be transacted to any wallet, anywhere, at any time and at minimal cost in a matter of minutes. In contrast to public perception, bitcoin is hardly used to fund criminal activities.
According to a 2019 report by research firm Chainalysis, criminal activity represented 2.1 per cent of all transactions. In 2020, this fell to 0.34 per cent, around US$10 billion. In Hong Kong, a major hub for global cryptocurrency exchanges and innovators in the payments space, demand for bitcoin is likewise on the rise. There is little reason to suggest it will subside any time soon.
As it stands, however, there is a chance Hong Kong might attempt to ban retail traders based in the city from actively trading cryptocurrency on spot and derivatives markets. This should be clarified in the coming year.
Blockchain-powered platforms allow anyone with an internet connection to trade across thousands of cryptocurrencies and tokenised assets without inhibition. Even without the big exchanges we have come to know, many of which have their roots in Hong Kong, decentralised exchanges that exist only in code always make it possible for people to trade on a peer-to-peer basis. Bitcoin and the space it represents are undeniably appealing to a new generation for whom the web signifies agency and a lack of borders, and institutional investors are going long.