Written by Kunal Sawhney, CEO Kalkine Group
Cryptocurrencies and meme stocks have dominated the news circle recently due to the huge swings in their market prices and the possibility of huge returns. Meme stocks such as GameStop and digital coins have risen in popularity as an investment choice among millennials and non-professional investors during the pandemic due to high savings rate and lockdown rules, thereby driving market prices higher.
Volatility in cryptocurrencies
The oldest and most popular cryptocurrency, Bitcoin (BTC), touched an all-time high of US$ 64,829.14 in April 2021, rising by over 450 per cent in the six months. Since then, the cryptocurrency suffered a sharp fall, losing almost 50 per cent of its market capitalisation triggered by electric vehicle giant Tesla’s founder Elon Musk’s statement.
Musk cited Bitcoin’s increasing use of fossil fuels and stopped accepting it as a form of payment in May, in a surprising reversal after investing about US$ 1.5 billion in the digital currency in early 2021.
However, while BTC has recovered partly from its price crash in May, the fluctuation in its prices have highlighted critics’ main point of how the digital currency faces high levels of instability to external shocks and news.
Smaller cryptocurrencies such as Ethereum and others have also faced similar levels of volatility, prompting central banks, regulators, and experts to raise concerns over investors losing their money.
The surge in meme stocks
Meme stocks such as AMC, Clover Health, GameStop, Wendy’s and more have risen in recent days or months owing to their viral status. Meme stocks are stocks of publicly traded companies that have witnessed a sudden spike in their trading prices following viral status via social media platforms such as Twitter, Reddit or others.
The hype generated by such stocks cause retail and amateur traders to invest in them with the hope of shorting the stock and generating returns. US-based video game and electronics firm GameStop is one of the most popular examples of a meme stock. Its shares rose from US$ 19 in early January to hitting an all-time peak of US$ 483 by 28 January.
While such stocks experience a sudden rally in prices, it is rarely linked to any intrinsic value of the stock or of the company’s overall financial health.
Thus, experts have argued that a stock whose prices skyrocket overnight shows the signs of being in a highly volatile market. According to US based investors Dan Niles and Paul Nolte, US based meme stocks are expected to crash in H2 2021 as the Federal Reserve’s monetary policy could ease up, thus leading to lower liquidity in the stock market thereby offering fewer opportunities for short selling.
Are they worthwhile investments?
Investments into cryptocurrencies from professional and retail investors alike have been primarily due to investors considering digital coins as a hedge against inflation, to be an early adopter in a future method of payment or to make a tidy profit by investing for a short period of time.
Cryptocurrencies are highly speculative, but they can either be a long-term investment or a short term one depending on an investor’s strategy. This may not be the right investment choice for a risk averse investor, but for those who can time the market or for those who believe in the assets’ long-term viability, it can be a way to diversify one’s portfolio. While one can reduce investment risk by diversifying into various digital currencies, it is still entirely possible to lose all of one’s money.
Furthermore, since the cryptocurrency climate is ever-evolving, one cannot conclusively say whether it is not a beneficial long-term investment or not.
In a similar manner, meme stocks can give good returns if an investor can get in at the early adopter phase while the stocks prices are yet to rally or hit their peak. Since such stocks have the primary goal of being short squeezed, they are not typically held as a long-term investment, however, certain stocks do have the potential to be long term investment which can give good returns, although they are very risky.
Financial advisors concern
According to a recent report by strategic insight company Opinium, about 93 per cent of UK based independent financial advisers (IFAs) said they would never recommend investing in cryptocurrencies. Moreover, about 95 per cent said they also would never recommend investing in meme stocks.
The report, which was based on a poll from 200 IFAs, also showed that about 91 per cent of them would be concerned if a client had plans to invest in either meme stocks or digital coins. This indicates financial advisors are worried over such assets due to their high volatility levels, challenges with regulatory oversight and more.
However, 33 per cent of UK based IFAs have also mentioned that their clients expressed interest in digital currencies in 2021, while 14 per cent reported more interest in meme stocks, highlighting the uptake in retail and professional investors interest in these assets, despite such concerns.
Thus overall, cryptocurrencies and meme stocks have clearly gained mass attention and interest due to the possibility of making lucrative returns despite the volatility and risks associated with investing in such assets. However, these assets may not be the safest bet for risk-averse investors.