Meme Stocks Crumble, Kicking off Major Concerns Among Amateur Investors

After rallying earlier this summer, meme stocks like GameStop and AMC have crumbled, with some losing up to 40% of their value going into trading on Friday. According to Investor’s Business Daily, June 2 was the peak day for meme stocks across the board. Since then, fifteen of the most popular stocks discussed on social media have collapsed, the initial energy that made them rally seemingly evaporating.

Roughly one-half of the gains the stocks had made this year has vanished over the past few days, with the nosedive solidifying dire warnings from establishment analysts that something like this was bound to happen. Redditors who held on to their aggressive GameStop and AMC positions through the peak publicly tell each other to remain calm and hold on to their stocks. However, the smart money says that the best time to sell was weeks ago. The second best time to sell might be right now.

Price Free Fall

The price free-fall seems to be primarily related to the investor sentiment on trading message boards like Reddit’s WallStreetBets. Posts there have kept an irreverent tone, though an undercurrent of genuine concern is evident.

Nicholas Colas, the co-founder of DataTrek Research, tells IBD that the “meme stock craze is entering a new phase, one with fewer new retail stock traders, which will make these names even more volatile. Every craze needs new adherents (not just the same crowd) to keep it relevant, and those are in increasingly short supply.”

The price fall timing coincides with fewer newcomers to the scene, as those with disposable income or the inclination to get into meme stock trading have largely already bought in. The ones who didn’t sell out now feel the sting, especially if they bought stocks like AMC earlier in the summer.

AMC Theaters
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Timing is Money

As bad as it sounds that most meme stocks have erased half of their gains on the year, this isn’t bad news for investors who got in before the first significant rally. If someone bought GameStop shares when they were $4, they could still cash out now for a huge profit. However, had they done so in early June, they would have made significantly more money, meaning they failed to capitalize on their unrealized gains, hoping the stock would trend even higher.

For months, analysts say that the market is overvalued, and the smart money was selling out of aggressive positions. Reddit’s philosophy, however, was to buy and hold and to view selling out of meme stock positions as a concession to the establishment. Now, those who bought in late are left looking at significant losses on their investment.

All Flash, no Substance

Establishment investors have derided meme stocks for being entirely generated by hype. For instance, GameStop’s stock price is extremely high, thanks in large part to a short squeeze that forced short sellers to cover aggressive bets against the company’s future performance.

However, GameStop’s actual performance is the issue now. The company primarily operates as a retail chain store, though new executives are pushing it to become a digital hub for gaming. However, GameStop’s competition in this space is exceptionally fierce: most gamers buy their games from digital storefronts offered directly through their consoles.

Similar criticisms have been leveled at other “meme” stocks, like AMC and BlackBerry. Analysts have cautioned retail investors that online hype alone can’t sustain a stock’s price. When newcomers stop funneling cash into the memes, the market’s regular forces take hold and bring the stock prices of underperforming businesses back down to earth.

Notebook with Gamestop stock chart. American video game, consumer electronics, and gaming merchandise retailer.
Adobe Stock

Crypto Suffers as Meme Stocks Fall

Meme stocks aren’t the only internet favorite taking a beating. Cryptocurrency is currently in a downturn across the board thanks to bearish sentiment from enthusiasts and regulatory pressures from governments. The creator of Dogecoin, a cryptocurrency that pokes fun at crypto, has openly called the new form of digital currency a “scam”.

In a series of tweets sent earlier this week, Jackson Palmer noted that he now thinks cryptocurrency is “built primarily to amplify the wealth of its proponents through a combination of tax avoidance, diminished regulatory oversight, and artificially enforced scarcity.”

He insists that cryptocurrency isn’t the equalizing force that some enthusiasts claim it is. “Despite claims of “decentralization”, the cryptocurrency industry is controlled by a powerful cartel of wealthy figures who, with time, have evolved to incorporate many of the same institutions tied to the existing centralized financial system they supposedly set out to replace.”

In light of Palmer’s tweets and ongoing regulatory concerns, crypto’s downturn coinciding with the crumbling of meme stocks makes sense. Similar voices on social media champion both and both are sold with a promise of making the regular investor fabulously wealthy someday. Is this the end for meme stocks and crypto bulls? While no one should count either of them out, things currently look grim for the internet’s favorite investments.

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