Time to Ditch Meme Stocks?

Meme Dilution? GameStop bull “Roaring Kitty” was briefly a billionaire on paper last night after the price of GME surged to nearly $70, but a stock split announcement this morning reversed his fortunes and those of retail traders following his bet! How much abuse will investors take until they turn to crypto?

Roaring Kitty tweeted out an image of a green Uno reverse card this weekend before subsequently disclosing his monstrous GME position made up of 5M GME shares and 120k contracts of $20 June 21, 2024, GME calls – igniting hopes for an aggressive short squeeze and a massive pump in price.

Yesterday, his YouTube account scheduled a livestream for today at 12 PM EST, which revealed little information other than a seemingly auspicious green candle and included a caption from The Babadook stating, “I’ll wager with you, I’ll make you a bet,” leading traders to speculate what his next moves would be.

Plenty of market participants had understandably positioned themselves for bullishness, expecting whatever statements or actions Kitty made during the stream to catalyze another move up in price.

Unfortunately for bulls, the GameStock Corporation prudently chose to capitalize on the hype by announcing the issuance of 75M shares during earnings this morning, and no new developments came from Kitty’s stream, pouring cold water on the rally.

Considering the immense flexibility corporations have in deciding to issue new stock and the contrary goals they may hold to meme stock investors, many have called into question the idea of participating in meme mania via traditional financial assets.

Unlike stocks, which can be easily diluted by their issuers, many crypto tokens have hard-capped supplies or known issuance schedules.

Although the supply of many tokens is known, or can at least be projected with some degree of certainty, newer memecoins have heavily concentrated supplies and have not withstood the test of time, providing little confirmation of a truly decentralized holder base and increasing the risk that buyers get dumped on.

Alternatively, more established memecoins such as DOGE, possess strong guarantees of decentralization, demonstrated by their historically resilient communities which have stuck around through multiple cycles.

Despite the carefully crafted Roaring Kitty persona intended to portray Keith Gill as “just another retail investor” who enjoys cold beer, talking about basketball, and is optimistic on the long-term future of GameStop, Gill was formerly a Chief Compliance Officer at an investment advisory firm and previously bore the honorifics of CFA charterholder and FINRA licensed securities broker.

Frenzy-driven, leverage-juiced buying can certainly drive up price in the short-term, but even GME is bound to trade in line with fundamentals as holders eventually cash out. Stocks represent ownership in a business, which are ultimately driven by the pursuit of maximizing value for shareholders, leading companies to raise cash via share sales as the market prices diverge from a realistic valuation.

For followers of the Kitty – who seemingly has no plans at the moment other than expressing his belief in the long-term future of GME through short-dated options – it is unlikely that a major bounty awaits on the other side of this rainbow, potentially leading participants to pack it up and migrate to the crypto casino with whatever remaining funds they possess.