The stock of GameStop, a video game retailer, was trading around US$20 before becoming a household name in early 2021. It suddenly rose to nearly $350 per share, without any fundamental changes for the company – and brought the wild world of cyber-investing into the spotlight.
Apps like Robinhood have “gamified” financial trading and provided bored and COVID-isolated gamers with a financial outlet for their speculative urges.
There’s nothing special about what’s happening in a historical financial sense. Trading is fundamental to human society, whether it’s physical or digital. Some evolutionary psychologists even believe humans’ need to deal with the complexity of trading between early societies affected the development of the modern human brain.
Figuring out the value of an asset is hard, and perceptions of value can differ widely for different investors. That’s why so many people will jump on a hot trend or stock – it’s easier to follow a crowd that’s already decided there’s some value to be had there.
The problem with that approach is that value is so subjective. In free markets, the price of a stock is really whatever someone is willing to pay for it.
But speculating and trading are not the same thing as investing, as anyone who lost money on an ill-advised GameStop bet can tell you. Research and due diligence are much safer ways to evaluate the potential value of a company than strategies predicated on message boards and hope. Once you understand a firm’s underlying value and what drives it, you’re in a much better position to figure out if its stock is suitably priced.
The online Reddit chat rooms that power the trading in GameStop started with enthusiasts but have grown to include sophisticated players willing to take advantage of the inexperienced. That’s also nothing new, which is why financial markets are highly regulated. The unscrupulous have been relieving the trusting of their valuables since well before stock markets appeared in the coffee and teahouses of Europe in the 1500s to finance the exploration and trade to “new worlds.”
Speculating on these apps isn’t unlike children’s games like as Roblox’s Adopt Me game – which also became hugely popular during the pandemic. The game lets players trade pets with each other. The most rare and in-demand pets are the most expensive. All pets have a rating that helps kids ballpark their value – not unlike a brokerage analyst or a credit rating analyzing a company.
Players don’t always agree with that assessment of value though, and that’s what “makes a market.” There are great opportunities to acquire amazing pets that a player considers far more valuable.
But anyone who isn’t aware of the ratings or a pet’s true value can make a bad trade and accidently give away something really good – or agree to a trade that leaves them with a dud.
Not unlike what’s happening with Robinhood and GameStop.
You can learn more about Adoopt Me and what it teaches us about real-life trading here.
Romina Maurino is a freelance journalist and the editor of The Financial Pipeline.
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