Social Media Is The New Fundamentals For Crypto
Despite the drastic transformation brought about by the internet and the rise of the Information Age, many stock market investors still stick to the fundamental investing models that have been around for the better part of a century. The year was 1949, and the global economy was in the midst of a post-war building boom when arguably the greatest book on investing first saw the light of day. This book goes by the name of ‘The Intelligent Investor’ by Benjamin Graham and it has been described by Warren Buffet as the best book on investment ever written. Buffet, who was an employee and protégé of Graham at one time, has made an epic career from the sort of fundamental analysis introduced in the ‘Intelligent Investor’, which looks at metrics like discounted cash flows and price-to-earnings ratios to evaluate investments.
Yet the Graham-like fundamental analysis fails to explain the growing phenomena of meme-stocks and cryptocurrencies. For example, shares of GameStop and AMC Entertainment Holdings have returned 1,300% and 3,000% since January 2021 without any notable growth in the fundamentals. Instead of steadily climbing in response to fundamental growth, the cult-like following of meme-stocks on social media has fueled this meteoric rise. A similar situation can be found in the crypto markets, where the notion of community growth and sentiment is baked into the fundamentals of a project. Cryptocurrencies live and die by community sentiment, and traders must be finely tuned in to the variations in sentiment in order to succeed.
Clearly, the old way of doing business needs some serious refreshing in order to keep up with the shift towards meme-investing, and it all begins with comprehending social data.
The Rise of Social and Meme-Stocks
In hindsight, the meme-investing boom seems rather inevitable. When a one-in-a-generation pandemic hit the world in early 2020, governments knew that they had to do everything in their power to keep the economy operating smoothly in the face of lockdowns. This resulted in the most aggressive money-printing spree in history, with the US Federal Reserve alone adding more than $4 trillion to the global money supply. With all this new money making its way through the economy, and with many young people kept at home due to COVID-19, it’s no wonder that asset prices saw a tremendous increase over the past year.
This though still doesn’t explain why the market, particularly the new generation of Robinhood investors, chose to push stocks like GME and AMC to historic highs. In order to understand the motives behind today’s meme-stock investors, one must keep tabs on all the TikTok videos, Twitter tweets and Reddit subreddits where these activist investors coordinate to pump the price of stocks or cryptocurrencies they support.