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

Original title: "We talked to the "degenerate retail investors" behind the new round of meme stock craze"

Original author: Hannah Miao, Gunjan Banerji, THE WALL STREET JOURNAL

The U.S. stock market is full of "degenerates".

A high-risk trading style is making a comeback, driven by amateur traders who call themselves "degenerates". These traders are keen on high-risk transactions 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 certain trend. Others are just watching the fun and playing with the meme mentality.

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

Using online pseudonyms, these self-proclaimed “degenerates” brag in chat rooms about buying obscure digital tokens, meme stocks and speculative options contracts. They often value the thrill of such trades over the fundamentals of the assets. Such trades can bring almost immediate profits, but can also result in huge losses if the bets fail.

The “degenerates” are one of the factors driving the “meme stock mania”, such as the counter-intuitive movement of GameStop shares in recent weeks. When these internet-powered traders band together, they have the potential to cause big moves in asset prices. All it takes is for a meme to go viral.

In May, when everything from major indexes to meme stocks was soaring, social media was flooded with references to “degenerates” and “degenerate trades”. Across social media platforms like Reddit and X, “Degenerate” and its variations have been mentioned more than 370,000 times, up from fewer than 1,000 in April, according to Hootsuite’s social media performance engine.

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

With people stuck at home and getting extra cash from stimulus checks during the coronavirus pandemic, short-term trading has exploded. Apps like Robinhood have made trading fun and easy, 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 launched 24-hour trading last year and this year expanded the number of stocks that trade overnight, making it easy for degenerate traders to invest in stocks around the clock and try to catch a move in certain stocks.

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

Since then, brokerage volume has retreated from its COVID-19 highs. Many day traders have returned to their day jobs.

Some on Wall Street wonder if the meme stock craze is just a flash in the pan. But the diehards stick around. Along the way, parts of the market have become like casinos.

Last month, “Roaring Hello Kitty” reappeared on the X platform, reigniting a trading frenzy in GameStop and other meme stocks. On Sunday, an account associated with Gill shared a screenshot on Reddit showing a position of more than $180 million in GameStop, setting off another round of roller-coaster trading. The stock has more than doubled in the past month.

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

For example, traders who bought options tied to GameStop’s jump to $20 before the recent stock market rally could have made returns of more than 2,000%, according to Cboe Global Markets.

Source: Options Clearing Corporation

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

Still, some fallers say the returns from such boring investing aren't enough. They're hungry for fatter profits and hope a big win will make a real difference in their lives.

While data show a strong U.S. economy, inflation has raised grocery prices and the cost of renting a home. The Federal Reserve's move to curb inflationary pressures by raising interest rates has 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 the milestones reached by previous generations. Long-term surveys of young Americans show that Generation Z is more disillusioned than any previous generation still alive after the COVID-19 pandemic.

Matt Kielczewski, 32, said he began investing in cryptocurrencies in 2017 because he was attracted by the "promise of financial freedom." He had opened an account with Coinbase at the time and needed bitcoin to pay for tickets to a solar eclipse festival. The $10 left in the account turned into $100 six months later.

"That's when I had an epiphany," he said. “This magical online currency is changing people’s lives.”

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

At first, Degenerate 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’s 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 to an all-time high in March, according to CCData, a provider of cryptocurrency data. That includes trading in bitcoin, as well as Degenerate investing in so-called meme coins, which are created for fun and often refer to popular inside jokes online. A cryptocurrency called Dogwifhat, which is 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 is even a Degen coin, which has seen wild swings in value.

Penny stocks have also made up a larger share of U.S. stock trading this year, rising to 14% by the end of May, the highest level since Cboe Global Markets began looking at data from 2016.

Note: 2024 data as of May

Source: Cboe Global Markets

Degenerates and their ilk are also flocking to online sports betting. The National Collegiate Athletic Association surveyed 3,527 people aged 18 to 22 last year and found that 67% of those living on college campuses had 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 adopted by the crypto community first and then spread to other markets. Some began seeing the term during the “DeFi Summer” of 2020, when a flood of money poured into the decentralized finance component of the crypto world.

What’s clear is that the term and style of trading are catching on. As online mentions of “degen” and “degen trading” surged in May, data from J.P. 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’re “degening” (betting like a gambler) on things like meme coins. It’s similar to how some traders call themselves “ape,” or say they’re taking large positions, “aping” (mindlessly following the crowd) on an asset. It’s a sign of bravery to band together and coordinate trades on platforms like Reddit or Discord. Those who take such big risks are admired by their peers.

“In online jargon, ‘faller’ might actually be a nickname,” said Dustin Burnham, a 41-year-old anesthesiologist assistant in Melbourne, Florida. “It might imply a willingness to take risks that others wouldn’t take to achieve a goal.”

Burnham said he doesn’t consider himself a degenerate investor, though he is active in communities filled with ape emojis.

Few retail investors have made even a fraction of the fortune 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. New users flocked to crypto around the 2021 peak, for example, and some suffered huge losses in the subsequent plunge.

Source: J.P.Morgan Global Quantitative and Derivatives Strategy

After the GameStop drama of 2021, the Securities and Exchange Commission (SEC) proposed guardrails related to trading apps to curb what regulators see as the gamification of trading. Such moves have so far been strongly opposed by the brokerage industry and Congress.

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

While she does a fair bit of memecoin trading and enjoys the markets 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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