Robinhood is revolutionary because it brings the potential to trade stocks to anyone that has a smartphone. As a strong advocate of personal liberty I consider this mainly a good thing- most people can now trade at their discretion and can more easily access financial freedom. However with the increased access that “retail” investors have to wildly speculative bets- such as in the case of Hertz (whose stock jumped shortly after they announced bankruptcy)- there is certainly going to be an increased chance that novices looking for easy, fast money will be enticed with claims of being able to make lots of money in a short time period based off the amount you invest. Small, illiquid investments, such as DogeCoin, tend to be especially prone to fraudulent manipulation and price bubbles because it is easy to send the price higher due to its illiquid nature. Stocks like Amazon can see more than 500 million shares trade hands and will only budge 1.80 percent on any given day, mid and small caps stocks, such as CROX, may only see 95000 shares trade hands but their stock will move twice as much in percentage terms.
Recently on Twitter there was a trending hashtag, #Dogecoin. As of writing this hashtag is trending at number two. Upon clicking on these posts one will see market manipulation in broad daylight, a semi-Ponzi scheme where the only winners are people who cash in and sell all their holdings in DogeCoin before the bubble pops. On any of these pumped, speculative bets that have caught fire there will be people who get in near the top (I’m sure by the time most people hear of the potential to make easy money in DogeCoin the bubble will be at its peak) and regrettably lose all their money invested because they didn’t get out quick enough or they never even had a chance to sell for a profit. And, just like a Ponzi scheme, a stock market bubble only supplies value as long as people are still supplying money to increase the asset price. All it would take would be a slight showing of fear in the market- maybe in the form of an extended price drop- for panic selling to occur. The other problem with market manipulation is it demands a constant steady flow of buyers. The invested money of robinhood investors makes up less than two percent of all the money in the stock market, which tells you that even if every single retailer investor out there was buying DogeCoin, all of them hoping to cash out on huge profit, the bubble would eventually have to pop no matter what. Sellers cashing in on profits will inevitably outnumber the buyers which could lead to a chain reaction, crashing the bubble and erasing the savings of a lot of people who were looking for an easy way to make money.
By no means, however, am I suggesting that we should impose restrictions on the novice investor. I am also not suggesting that the stock market as a whole, or even in certain sectors, is in a bubble although it is worth noting how many of these bubbles are happening partially because of retail investors. One of the keys to figuring out if you’re invested in an asset bubble or not is whether or not you believe the current market or individual stocks are in a bubble. What I find is it is hard to call when markets are inflated because the sign of a true bubble asset is that no one believes they are in a bubble; in a bubble everyone is a buyer. Asset bubbles are represented by irrational exuberance (in the case of Dogecoin everyone thinks they are going to make a profit,) and I assure you there is no shortage of bears in the market- only recently did hedge fund managers reduce their short positions by 80% (which could also mean we are close to the end of the short-squeeze related gains in the market). For every headline that says now is a good time to buy, there are 5 headlines claiming we are in a bubble. Asset bubbles only form when everyone is buying. However, rampant inflation and asset bubbles always run in to the same wall, namely when everyone runs out of money it (either the price of the asset or the inflation rate) decreases.
I don’t have any sure-fire ways to guarantee that retail traders won’t make their lives worse in pursuit of easy money, but I can guarantee that government restrictions on retail trading will do more harm than good. However I do have an approach that is both logically sound and has never been tried before- but that’s the topic of a different blog post. In short, I think public education is a brutal mistake in which America and other developed countries are paying the price for, which would explain the lack of understanding of what makes a good investment by many beginning traders. To my novice investor friends: don’t trade stocks that don’t seem to have an inherent value to them, for example- shares of Hertz or Dogecoin. Panic selling can happen overnight seemingly. In the short run there is always fluctuations; but in the long run, markets (with no outside interference) never fail to assign correct valuations to whatever is being bought and sold. An asset that has no value to back it up will eventually expire worthless.
Edit: I wrote this post last night and already the Dogecoin bubble has popped, and many seem to have lost their money.
Unfortunately the stock market and other forms of investment will be the ultimate victim here. As more people feel betrayed because of their losses incurred in the cryptocurrency market, they will accuse the financial markets of being rigged towards the rich and unfair. In reality- history repeats itself and there is no easy way to eliminate scams and Ponzi schemes. If we could educate more people on financials and how to identify a proper investment- which is part of what I hope to do through this blog- their will be much more enthusiasm for the stock market which will help more people have access to financial freedom. In my opinion, the only two venues for making the world a better place are by protecting personal liberties (through classical liberalism) and education. Everything else (solutions to climate change, less government regulation, and so forth) will stem from increases in quality of education and less restrictions on people’s liberties.