GameStop trades and meme investing turn stocks into a pump-and-dump scheme

Sticking it to the man is a good rallying cry, and it was satisfying to see hedge funds lose billions. But in the end the little guy is going to get hurt.

A specialist on the trading floor of the New York Stock Exchange on Feb. 1.Nicole Pereira / AP

In "Wall Street," Oliver Stone’s iconic representation of stock market manipulation in the 1980s, the audience would see a surreptitious call made to a Wall Street newspaper with the cryptic utterance, “Blue Horseshoe loves [XYZ],” usually prompted by illegal insider info. That phrase was then repeated in multiple phone calls as word spread about stock XYZ and its price went up and up. The result? Those who bought it early made out like bandits by selling when the stock got to new highs, while those who bought in later often weren’t so lucky.

The hedge funds lost billions of dollars in just a few weeks. So far so good. But the danger was just beginning for internet-based consumers.

What does this scene of misbehavior have to do with GameStop and our current situation of “meme investing” via crowdsourced bets on stocks and cryptocurrencies? A lot.

The tools have changed: Instead of surreptitious phone calls, stock names are posted on public social media sites like Reddit, and instead of stock transactions being made by full-service brokers, they’re done by investors using mobile apps and sites like Robinhood. The players have changed, too: Shadowy Wall Street insiders have been replaced by large groups of individuals spread out over the internet.

But the result is similar: Groups of people collaborate to orchestrate a rise in a stock price based on increased demand, without regard for the company’s business prospects.

When the wild ride of GameStop started after bands of individual traders pushed it on Reddit, causing a steep rise in the stock price, it didn’t seem like such a bad thing to me and many others around me in Silicon Valley. It felt like a popular uprising against "the man." In this case, the man was Wall Street hedge funds that had shorted GameStop — in other words, they had made significant bets that the stock would crash given the video game retailer’s poor performance.

This created an opportunity for Reddit users to push the price of the stock up, causing the hedge funds — typically started by Wall Street insiders who some say try to manipulate the market for their own profit — to lose an ever-increasing amount of money. Amateur traders started touting GameStop on WallStreetBets, one of the most popular forums on Reddit, and watched the price go from $18.84 at the end of the year to an all-time high of $483 by the end of January. Tweets from luminaries like Elon Musk were widely seen as tacit support for the effort and drove shares higher. As a result, the hedge funds lost billions of dollars in just a few weeks.

So far so good. But the danger was just beginning for internet-based consumers. Those who bought in early and sold during the highs did very well. But those who bought in later, at prices that were $200 or more, found themselves out of luck. The price suddenly crashed, and, as of Friday, GameStop stood at $51, leaving individual investors, many of whom are younger, with thousands of dollars in losses.

The pattern played out again with AMC Theatres, another brick-and-mortar institution that hedge funds had trumpeted as a stock to sell short. Many who had participated in GameStop — and many like myself, who had simply watched — decided to get on the bandwagon just to try it out. AMC stock was on the rise, from $3 to an eventual high of $20. I myself bought a few shares at $15 to see how far the crowd’s momentum could take it and to fight the good fight to help movie theater chains like AMC survive.

But after rising to $20, AMC stock then retreated to around $5 per share, leaving me and many others with thousands of dollars in losses. It wasn’t all bad, as AMC was able to avoid bankruptcy and shore up its business by selling more stock, making a moviegoer like me happy regardless. (I’m holding on to my shares for now.)

Next, the group moved on to promote cryptocurrencies, electronic currencies like Bitcoin. The success of Bitcoin has sparked many alternative coins (or altcoins), which are less popular, less liquid coins whose price movements are often determined more by speculation about what the “next big coin” will be than any economic fundamentals.

Against this backdrop, Redditors decided to push Dogecoin, an altcoin that was started almost as a joke and has a picture of a dog as its mascot. It began to rise dramatically, soaring to nearly 10 times its previous price, baffling even the coin’s founder. Musk once again got in on the game, tweeting about the coin to his tens of millions of followers. The coin continued its rise to almost 20 times its price on Jan. 1 before stabilizing and settling back to approximately 10 times its price when the surge began. (I sold a portion of my Dogecoin, more than making up for my losses on AMC, but am still holding on to some for posterity.)

But is this kind of bandwagon investing in “meme stocks” — named such because of how they are touted on social media platforms — really a good thing for consumers? Especially ones who are betting a significant portion of their savings and don’t have a history of investing in risky ventures?

In my own case, I could afford to lose the money I put into AMC, and as an avid investor in cryptocurrencies (including Bitcoin) and startups for many years, I know that the risk of losing all your money in any one investment is very real. But for many who are younger and less experienced, meme investing ratchets the old idea of a stock tip up to a whole new level of virality and financial risk. The rapidity with which the “tip” spreads and a new person can establish an account on apps to buy the latest hot thing makes it a much more fast-moving and potentially volatile proposition.

After bands of individual traders pushed it on Reddit, causing a steep rise in the stock price, it didn’t seem like such a bad thing to me and many others around me in Silicon Valley. It felt like a popular uprising.

While sticking it to the man might have been a good rallying cry initially, the quick rise and descent of GameStop and stocks like it starts to make meme investing look more like a pump-and-dump operation and less like democratizing finance. The idea of a Ponzi scheme, which was pioneered by Charles Ponzi and named after him when he was arrested at the start of the roaring 1920s, was that those who got in early on the scheme made money by selling to those who got in later at much higher prices. It may be that something similar is going on here. Today’s insiders are influential social media personalities profiting by buying early, spreading the meme and getting their followers to buy in.

That means most of the people putting money into the next big thing aren’t really investing; they are truly just gambling online. That may not be a good thing for our markets or economy — or the little guy — after all.

CLARIFICATION (Feb. 19, 5:20 p.m. ET): An earlier version of this article stated that WallStreetBets pushed cryptocurrency Dogecoin. Other Redditors were more actively involved in driving its price higher. The article has been updated.