From GameStop to crypto: How to protect yourself from meme stock mania

Recent rallies in stocks popularized on social media have attracted increasing numbers of investors looking to these so-called "meme stocks" for quick returns. But while it might look like a fun game, there are real risks to investing in stocks and other financial products popularized on social media. And with recessions looming around the world, the danger is becoming even more acute.

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The term meme stock was traditionally used to describe any share that receives a lot of attention on social media. One of the more notable recent examples of a meme stock, retailer GameStop, saw its stock soar by more than 10,600% in 2021 following discussions by individual investors on r/WallStreetBets—a popular subreddit on the Reddit social media platform. You've probably heard about other instances of assets popularized on social media of late, including cinema chain AMC and US retailer Bed Bath & Beyond.

Meme stock rallies have also boosted cryptocurrency products, such as stablecoins and non-fungible tokens—basically any assets for which hype has been built online. And while these new decentralized finance assets are very different to stocks, the way sentiment is formed about these assets on social media tends to be the same.

Recent research I carried out with colleagues aimed to understand the role of Reddit in the GameStop share rally involved a textual analysis of 10.8 million comments on r/WallStreetBets and high-frequency GameStop prices. What we found sends a warning signal to all meme stock investors: online chatter pushes prices up but can't save investors when asset values start to collapse.

Our analysis showed that online discussions—or "net sentiments," as shown in the chart below—on r/WallStreetBets helped to initiate GameStop's price growth and caused a spike in trading volumes during the bullish market for this stock when the hype was high.

But we found that positive comments by people on Reddit could not prevent GameStop from falling when people started selling. In early February 2021, online sentiment was growing, that is, there were more positive comments about GameStop than negative on r/WallStreetBets, even as investor returns for GameStop stock (recorded at 30-minute intervals for our research) kept falling and trading volume decreased.

Investors should learn a lesson from the GameStop story. When online commenters are trying to hype a stock, they will often add hashtags such as "to the moon" and HODL (a misspelling of "Hold"—as in hold the stock rather than sell—that has become an acronym for hold on for dear life in the online trading world). But if the price starts falling, it does not matter how many of these hashtags are in the comments on a subreddit, our research shows the wider market reaction to the price decline will outweigh any encouragement made on investment forums. 

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