WSJ: We talked to the corrupted retail investors behind the new round of meme craze

Original title: We talked to the degenerate retあいl investors behind the new round of meme stock craze

Original article by Hannah Miao and Gunjan Banerji, THE WALL STREET JOURNAL

The U.S. stock market is full of fallen men.

A high-risk trading style is making a comeback, driven by amateur traders who call themselves degens. These traders are keen on high-risk trades that are known for having nothing to do with traditional investment evaluation methods. Some people are willing to invest a lot of cash in specific stocks or cryptocurrencies just to participate in a trend. Others are just watching the fun and playing with the memes.

In their language, Degen can be a noun, adjective or verb, and is popular mainly among young people. It is a self-deprecating identity that some trace back to the term degenerate gambler. Behind it is a spirit that advocates bold bets on the market and questions investment norms: you only live once, so why bother with traditional financial advice?

Using online pseudonyms, the self-proclaimed “degenerates” boast in chat rooms about buying obscure digital tokens, meme stocks and speculative options contracts, often favoring the thrill of such trades over the underlying fundamentals of the assets. Such trades can lead to almost immediate profits, or huge losses if the bets go wrong.

The Fallen are one of the factors driving the “meme stock frenzy,” such as the counter-logical movement of GameStop shares in recent weeks. When these Internet-powered traders band together, they have the potential to cause large swings in asset prices. All it takes is for a meme to go viral.

In May, as everything from major indexes to meme stocks surged, social media references to “faller” and “faller trading” exploded. According to Hootsuite’s social media performance engine, “faller” and its variations have been mentioned more than 370,000 times across social media platforms including Reddit and X, up from less than 1,000 in April.

“It’s quick money,” said Daniel Moravec, a 39-year-old former professional poker player who calls himself “The Degenerate Trader.” “It’s better to buy some options or risky stocks than to buy lottery tickets.”

Day trading has exploded during the coronavirus pandemic as people stay home and get extra cash from stimulus checks. Apps like Robinhood have made trading easy and fun, while across the industry, brokers have eliminated commissions and offered fractional share trading, making investing cheaper than ever.

Today, investors are betting on everything from digital tokens that they know have no underlying value to risky options that could become worthless in minutes or hours. Robinhood introduced 24-hour trading last year and this year added stocks that trade overnight, making it easy for degenerate traders to invest in stocks around the clock and try to catch the action of certain stocks.

An online trader named Keith Gill has become the ultimate hero for many fallen traders, but he calls himself a value investor. His online nicknames are Roaring Kitty or DeepF——Value. In 2021, he led a meme stock revolution by betting big on GameStop and posting his investment information online. Newbie investors joined his ranks, sending the stock price of the troubled video game retailer soaring. They caused heavy losses to hedge funds that shorted the stock, attracting the attention of the U.S. Congress, regulators and Wall Street. Gills last post on Reddit in 2021 showed that the value of his GameStop shares had risen to about $30 million.

Since then, brokerage volumes have fallen from their COVID-19 highs. Many day traders have returned to their day jobs.

Some on Wall Street wondered if the meme stock craze was just a passing fad. But die-hard fans stuck with it. Along the way, parts of the market have become like casinos.

Last month, the roaring Hello Kitty reappeared on the X platform, once again igniting a trading frenzy in GameStop and other meme stocks. On Sunday, an account associated with Jill shared a screenshot on Reddit showing a position of more than $180 million in GameStop, setting off a new round of roller coaster market. In the past month, the stock has more than doubled.

Despite the long odds, bets tied to GameStop and other stocks favored by degenerate traders have surged, pushing the average daily volume of options this year to nearly 47 million, the highest level in the history of Options Clearing Corp. data going back to 1973. Much of the activity is in short-term trades, where investors can win big or lose everything.

For example, if a trader had bought options tied to GameStops jump to $20 before the recent stock market rally, the return could have been more than 2,000%, according to Cboe Global Markets.

Data source: Options Clearing Corporation

The U.S. stock market has been on a tear, with the SP 500 index returning nearly 11% annualized over the past decade. Meanwhile, many money market funds are offering near-risk-free yields of around 5%, among the highest in more than a decade.

Still, some of the fallen say the rewards from this more boring investment are not enough. They are eager for bigger profits and hope that a big win will bring substantial changes to their lives.

While data shows the U.S. economy is strong, inflation has increased grocery prices and rental costs. The Federal Reserve’s interest rate hikes to curb inflationary pressures have also pushed up mortgage rates.

Young people are particularly hurt by record-high housing prices and mountains of student debt, and some worry they will never make enough money to reach milestones reached by previous generations. Long-term surveys of young Americans show that Generation Z is emerging from the COVID-19 pandemic more disillusioned than any previous generation still alive.

Matt Kielczewski, 32, said he started investing in cryptocurrencies in 2017 because he was attracted by the promise of financial freedom. At the time, he had opened an account at Coinbase to buy tickets for a solar eclipse festival, which he needed to pay for with Bitcoin. The remaining $10 in the account turned into $100 six months later.

“That’s when I had an epiphany,” he said. “This magical internet currency was changing people’s lives.”

Kielczewski was making a living as an underground DJ in Colorado when the coronavirus outbreak wiped out his income. He now works in marketing for the cryptocurrency industry and lives in Lisbon.

At first, Faller trading made him feel like he belonged to something bigger than himself: a community of like-minded people. That’s when he started to worry about scammers, and now he sees “the huge toxicity that exists in this space.” He still trades weekly, but now takes more of a buy-and-hold approach to crypto.

Cryptocurrency trading volumes on centralized exchanges surged in March to an all-time high, according to CCData, a cryptocurrency data provider. That includes trading in Bitcoin and degenerate investments in so-called meme coins, which are created for fun and often refer to popular inside jokes online. A cryptocurrency called Dogwifhat, tied to an avatar of a Shiba Inu wearing a pink hat, was worth just a few cents at the start of the year but recently traded at around $3.36, up more than 2,000%. There’s even a Degen coin, which has seen wild swings in value.

Since the beginning of this year, the proportion of low-priced stocks in US stock trading has also increased. As of the end of May, the proportion has risen to 14%, setting a new high since Cboe Global Markets data showed in 2016.

Note: Data for 2024 is as of May Data source: Cboe Global Markets

Degenerates and their ilk are also flocking to online sportsbooks. The National Collegiate Athletic Association surveyed 3,527 people ages 18 to 22 last year and found that 67% of students who live on college campuses have placed a sports bet.

It’s hard to pinpoint exactly where the term “degen” originated, or how many traders would classify themselves as such. Many say it was first adopted by the crypto community and then expanded to other markets. Some began seeing the term during the “DeFi Summer” of 2020, when a large amount of money poured into the decentralized finance component of the cryptocurrency world.

Clearly, the term and style of trading are catching on. As online mentions of “fallers” and “faller trading” surged in May, data from JP Morgan Global Quantitative and Derivatives Strategy showed that the share of options activity originating from retail investors surged to more than 18% that month, the highest level since at least August 2020.

Traders might say they are “degening” (betting like a gambler) something like a meme coin. This is similar to how some traders call themselves “ape” or say they are taking a large position or “aping” (mindlessly following the trend) on an asset. It is a sign of bravery to unite and coordinate trades on platforms like Reddit or Discord. Those who dare to take such big risks are admired by their peers.

“In online lingo, ‘fall guy’ might actually be a nickname,” said Dustin Burnham, 41, an anesthesiologist assistant from Melbourne, Florida. “It might imply a willingness to take risks that others wouldn’t take to achieve a goal.”

Burnham said he doesnt consider himself a degenerate investor, but he is active in some communities filled with ape emojis.

Few retail investors have made even a fraction of the wealth that Gill appears to have amassed. A 2023 academic study found that many retail investors overpaid for trades in the options market and ended up losing money, especially around events like earnings releases. Many investors also failed to time crypto well. For example, new users flocked to crypto around the peak in 2021, and some suffered huge losses in the subsequent crash.

Data source: JPMorgan Global Quantitative and Derivatives Strategy

In the wake of the GameStop drama in 2021, the Securities and Exchange Commission (SEC) has proposed guardrails related to trading apps to curb what regulators see as the gamification of trading. Such moves have so far been met with strong opposition from the brokerage industry and Congress.

Maria Paula Fernandez, 38, who lives in Berlin, has been trading cryptocurrencies since 2017 and is currently a cryptocurrency trader. Her native Argentina has restrictions on foreign currencies, so the freedom and transparency promised by cryptocurrencies appeals to her.

While she does a fair amount of memecoin trading and enjoys the market for fun, she is skeptical of the Fallen ethos.

“It ends up affecting the way you look at things. You stop looking at things as financial instruments,” she said. “You just get sucked into this micro-culture.”

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