If you haven’t already heard about the rise of Gamestop ($GME), I’ll try to keep it brief, because let’s face it: if you’re interested in this kind of stuff, you already know what happened and why, and if you aren’t, you’ve definitely had someone try (and fail) to explain it to you already.   Large financial institutions bet billions that Gamestop’s stock would go down and everyday retail investors convinced bought the stock in an attempt to raise the stock price and force hedge funds to cover massive losses.  What started out as a localized effort on Reddit community “r/wallstreetbets” snowballed into a social movement that acted as a sort of socio-economic Rorshach test for the country.  Many retail investors and economic progressives saw the event as an opportunity to exact revenge on Hedge Funds for the 2007 housings crisis, buying shares of the stock simply as a middle finger to big banks.   On the contrary, economic conservatives, the wealthy, and the financial institutions themselves saw the stock’s rise as an artificial rise, one directly in violation of SEC regulations.  Now that the dust has settled, and the stock’s rise is over, I wanted to take a look at the phenomenon that led to the rise of $GME – the meme stock pump-and-dump.  

               The recent rise of retail investing (short term investments by everyday people with expendable income) can be attributed to three factors.  The first is the increased prevalence of investment apps like Robinhood and WeBull, which make investing more accessible and gamify it to get people hooked on short-term gains.  The other factors are directly related to the pandemic – since the early stages of the pandemic, when stocks experienced a sharp crash, the markets have been incredibly bullish, pushing all-time-highs in almost every sector.  It’s easy to dream about what could have been if you had taken some of your excess cash – say, the $2,000 check that the government handed to you – and bought into your favorite company back in April.  Americans have downloaded apps like Robinhood at an astounding rate, stimulus check in hand, ready to get their piece of the pie in one of the best markets in recent history.  

               The problem with these investors is that they are, for lack of a better term, financially uneducated.  Rather than taking the time to complete their own due diligence, and build a portfolio based on careful analysis, they want to make money as fast as possible.  And who can blame them?  Just as prospectors rushed to California in 1849 to pan for gold, Americans rush to the internet and social media, hungry for a voice to direct them in the direction of the next untapped vein of profit.   This ravenous hunger is exactly what enterprising, albeit morally ambiguous, social media con-men need to make a quick buck off of unexpecting Americans.   

It is a beautiful example of cutthroat capitalism.  It is the “Pump-And-Dump”.

             The process is incredibly simple, and although I won’t advocate you should because it’s morally wrong and in violation of SEC regulations, the truth is: you could do this with no prior knowledge and start making money tomorrow.   The first step is to build a social media presence – it doesn’t even need to be particularly large, especially if you’re able to make even one of your videos go viral.  As a bonus, get yourself a sleek setup, to ensure that you really look the part.  It’s all about building trust with your audience – you need to look and act like you know more than them.  Because the sector is completely unregulated, you can easily lie about a degree or professional record without anyone batting an eye.  These schemes choose their audiences carefully – posting on Facebook won’t get you anywhere, because its userbase is older and more fiscally responsible.  You are searching for the lowest hanging fruit possible, so post on apps like TikTok and Instagram.   If you’ve established even a relatively small userbase of >1k followers, you have everything you need to start turning their mistakes into your money.  

             Find a random stock, with emphasis on random – you want a company that is small and trades at very low volume each day.  If on average the company is bought and sold 7,000 times a day, then your small userbase can easily account for 25% or more of those trades in a day.   Buy a large number of shares and start pumping the stock.  Post about how it could “be the next GameStop”, or how you “won’t want to miss out”.  Add technical jargon that will fly over your userbase’s head, spouting off about its “Bullish MACD crossover”,  “low RSI”, and “5 day SMA crossover with a resistance level of $2/share”.  If you know what you’re talking about, great, but it really doesn’t matter if you don’t.  You just have to pass the smell test of the uneducates retail investor, who might as well not have a nose at all.  Now that you own a large number of shares of a company with trading at exceptionally low volume, your large follower count will account for most of the investors looking at that company, which means your words will have significant influence over the stock price.  The second that it rises, you want to sell – the company has no underlying value that warrants this rise, and it’s almost guaranteed that it will take a dive in the near future when your post has lost momentum.   By selling early, you will leave some potential profit on the table, but you minimize the risk on your end and ensure that your followers will be the ones suffering losses as they chase the unrealistic price target you engrained in their minds.  Rinse and repeat, boasting about your success and making your followers think that it is their fault they bought too late or sold too soon, getting them hooked on the adrenaline rush of investing and ensuring that they’ll be back for your next post.  

            Pump and dump schemes like this are as old as the markets themselves, but with the speed of social media and the emergence of meme culture, it’s easier than ever to take advantage of the uneducated masses. While GameStop itself was not a cut-and-dry pump and dump scheme, and the circumstances of its rise are too complex to attribute to some large-scale con, much of the discourse surrounding it is unsettling.  I frequent websites like “r/wallstreetbets”, and every day I am exposed to posts goading me into buying these garbage stocks.  As GameStop rose, 10 other companies were heralded as the next big thing.   AMC, Nokia, and Blockbuster saw a steep rise and an even steeper decline, leaving many first-time investors who just wanted to be a part of something “bagholding”, or refusing to sell based on some unfounded belief that their shares were just a day away from being worth millions.  GameStop will remain in the collective psyche of retail investors in the same way that the market’s bounce back from coronavirus-induced lows have – as a unicorn they can chase like an addict looking for a high.   “This could be like GameStop.  If only I had listened back then!”, they’ll say, unwittingly falling into the trap laid by social media con-men.  

                We can see it happening now with DogeCoin.  Although not a company (DogeCoin is a cryptocurrency, akin to BitCoin), thousands of TikTok and Reddit accounts urged their readers to buy in and ride it to the top.  It was lumped in with a legitimately executed short squeeze like GameStop for no legitimate reason, and real people lost vast amounts of money buying a digital currency that is literally named after a meme.  Meme culture pump-and-dumps are difficult for the SEC to regulate because they often operate on only a thousand or so viewers, and accounts will deliberately try to avoid raising suspicion by keeping their influence on the markets from becoming too large.  

                 So who is to blame here?  Yes, the people who orchestrate these schemes are squarely in the wrong, but some fault must be assigned to those who bought into these stocks without doing proper research.  If there’s one thing you take away from this, any money that you made or could have made during the GameStop boom was a fluke, and you really shouldn’t be investing in anything other than Blue Chip companies and ETFs without doing a lot of your own research.  The market is always one step ahead of you, and Hedge Funds and con men alike make their money off of idiots like us.  If you want to try to beat the system without being properly informed, go ahead – the odds are not in your favor.