At the start of the year, traders added more than $150 billion to the market cap of GameStop, AMC, and 48 other businesses, stocks that Robinhood put on a restricted trading list because they’re volatile (and can be used as a proxy for the craze).
What makes a stock valuable? In the olden days, the way stocks worked was that you gave some money to a corporation, which used the money to build a railroad and paid you a dividend as your reward. Maybe if times were good, the dividend would go up, and if times were bad, it would get cut, but if you bought the blue-chip stocks of good steam railroads, you expected to get your dividend. And then you could apply some straightforward math to figure out the present value of that perpetual stream of dividends, and that’s what you’d pay for the stock.
Then some companies thought, well, instead of paying this money out to shareholders, we could invest it in laying more new track and expanding our railroad empire, which will in the future allow us to pay even greater dividends to shareholders. This was actually a controversial idea back in the olden days! But it worked very well, to the point that now it would be quite weird for a fast-growing tech company to pay a dividend when it went public. Now the point of corporate profits is mostly to make the corporation bigger.
In theory that eventually ends: The corporation gets really big, it has more money than it can spend to keep growing, so it starts to give the money back to shareholders through dividends or stock buybacks. If you buy a fast-growing stock with no dividend, it is, in some very abstract sense, because you think the company will eventually pay a dividend (or do buybacks). Maybe not in your lifetime. But you can nonetheless do some math to estimate the present value of those expected far-future dividends and get a value for the stock, and someone will pay you that value now, and it all kind of works if you don’t think about it too hard.
Let’s keep going (and I promise to get to meme stocks eventually). What makes gold valuable? I gather that it has some industrial uses, but the main reason is that it’s shiny and pretty to look at and our ancient ancestors wanted it. They wanted it for long enough that “gold is a thing that everyone wants” became an accepted fact. Rich people in modern America don’t really keep a lot of gold around the house; tastes have changed, and now plating all your stuff in gold would be tacky. But “gold is a thing that everyone wants” has persisted as a generalized way of understanding the world. You buy gold because you figure people will always want to buy gold, not because you personally want to wear gobs of it around your neck.
What makes the U.S. dollar valuable? The main reason is that it’s the easiest way to buy things in most of the U.S. It’s a social fact: A dollar will buy about a dollar’s worth of goods and services, because everyone else will accept it for goods and services, because they trust that they can use it to buy about a dollar’s worth of goods and services, etc. The dollar is valuable in some rough proportion to confidence in the U.S. economy and its monetary and financial systems.
What makes Bitcoin valuable? It’s a cool technology, but the main reason is that a lot of people on the internet have agreed that it’s valuable. Unlike with gold and dollars, that consensus emerged from scratch in the past 10 years or so. But it did happen; “it’s a thing that a lot of people want” seems to be about as true of Bitcoin as it is of gold. You can’t wear gobs of Bitcoin around your neck, but you weren’t doing that with gold, anyway. It’s valuable as a social fact; it’s valuable because you expect other people to value it, because they expect other people to value it, because … there is no end to this recursion, but there doesn’t need to be.
What makes Dogecoin valuable? The answer is roughly the same as with Bitcoin, except that the people who are into it are kidding. They’re not buying Dogecoin—a coin based on a meme about a talking shiba inu—because they think it’s the currency of the future or a robust store of value that institutional investors will increasingly adopt. They’re buying Dogecoin because there are a lot of fun online communities and memes about Dogecoin, and they get to feel a part of those communities when they buy Dogecoin and post about how they will never sell it. And that sense of community is valuable. It’s worth something like $30 billion, the market value of all the Dogecoins in circulation.
What makes nonfungible tokens (NFTs)—often limited editions of weird pixelated images that you can buy with cryptocurrency—valuable? It’s the same sort of story: It’s a way to represent the value of membership and status in a particular sort of online community. Owning Crypto Badger #6,942 signifies a kind of belonging; paying $3,000 for it proves that this kind of belonging is valuable.
Human life is lived, increasingly, online. If you are a person living in an advanced economy with a certain amount of money to invest, the odds are pretty good that your work consists largely of sitting in front of a computer and typing, and that your social life, particularly during the long Covid-19 pandemic, consists largely of sitting in front of a phone and typing.
Maybe this is just a bad thing, and the world is getting worse and less meaningful and more isolating. But people do ascribe a lot of value and meaning to their online interactions. Modern life being what it is, if you ascribe value to something, you can put a price on it and trade it on an exchange and maybe have a nice little bubble.
Dogecoin and NFTs are pretty arbitrary, though. Why are these the tokens of their online communities? How many people are that into talking shiba inus? Venture capitalists love to buy CryptoPunks, which are highly pixelated little images of people, some with mohawks, none, as far as I know, with vests and Allbirds. Are these venture capitalists into punk music or a punk lifestyle? All of them? Really?
The things to realize are that (1) membership in an online community can be valuable, (2) a token of that value can be priced and traded and soar in value as the community becomes larger and more intense and more meaningful, (3) the valuable communities are shifting and fluid, and people can dip in and out of them, and (4) the token itself is arbitrary.
Oh, and (5) the biggest incentive to join an online community is probably “the people in this community are making a ton of money.”
What makes GameStop stock valuable? In particular, what made GameStop briefly worth as much as $483 in the last week of January, after it started the year at $18.84? There’s no dividend. There are some clever technical stories, about “short squeezes” and “gamma squeezes,” where retail traders could somehow force professional traders to buy the stock and push up the price. These may have some truth to them, but they probably don’t explain much.
The simple story of GameStop is that some people on the internet liked the stock. When it was trading at $18, a few of them liked it for good old-fashioned fundamental present-value-of-future-dividends reasons; they thought GameStop’s business was underrated and would do better than the market expected. So they bought the stock, and it went up.
And they had a lot of fun doing it. Because the stock went up, but also because it was in the middle of a pandemic winter and they were hanging out online with their friends, people who shared their interests (in GameStop) and supported one another (in buying GameStop) and had inside jokes (about rocket emojis and “diamond hands”). A little social scene developed, on Reddit, around GameStop.
And also the stock went up, so other people noticed this. They wanted to join the social scene, because it looked fun and the stock was going up. And at some point the stock just achieved escape velocity. You didn’t buy GameStop stock as a bet on the future cash flows of a struggling mall-based retailer of video games. You bought GameStop as a token of membership in an online community that was intense and messianic and fun and also getting pretty rich.
Or, of course, you bought GameStop as a bet that other people would buy it as a token of membership in a community. You can speculate on the value of online communities without fully joining them.
GameStop had some attractive characteristics to become a meme stock: video game nostalgia; high short interest; a tech-savvy activist investor, Ryan Cohen (now the board chair), pushing big changes to the business. It was, in many ways, easy to love. But the essentially social and online process of falling in love with it—the process by which it became a meme—could be repeated over and over again. And so it was, mostly on a smaller scale and a shorter timeline, over and over again. Every week or so there was some new meme stock, some new set of retail enthusiasms. A few stuck around, like AMC, whose double-Harvard-educated CEO goes around calling his shareholder fans “apes.”
In October, Donald Trump launched a fairly flimsy media company. It does not appear to have any products or operations or business plan. But there is—obviously—an intense online community of Donald Trump fans, and Trump’s company gave them a token to buy as a symbol of their membership in that community. The stock went up 845% in its first two days of trading. It wasn’t because of the dividends.
Meanwhile a lot of people go around trading a lot of stocks based on their expectations about the underlying companies’ future cash flows. That’s fine, too! That’s one reason to like a stock, if you think the company issuing the stock will eventually have lots of free cash flow that it will return to shareholders like you. Five years ago it would have been fairly uncontroversial to say that that’s the only good reason to like a stock. Things are different now.
-Read full story on Bloomberg