The recent surge in all Reddit’s r/WallStreetBets has shown off the tremendous power of younger digital-native investors. It’s been incredible watching how these online traders have managed to make a huge wave in retail stocks such as Gamestop (NYSE:GME). However, consider that this isn’t the trading community’s first big win. That, in fact, was Bitcoin (CCC:BTC-USD).
While people of all ages have invested in Bitcoin, youth have been the first adopters. A fall 2020 poll found that 55% of 18-34 year-olds were “likely” or “very likely” to buy Bitcoin over the next five years, compared to 46% of 35-44 year-olds, 36% of 45-54 year-olds, 19% of 55-64 year-olds, and just 8% of retirees. Cryptocurrency may become a trend that spans all generations, but for now, it’s still primarily in the domain of younger traders.
That makes the recent r/WallStreetBets phenomenon even more fascinating. The savvy traders that powered up the rise of Bitcoin, Ethereum (CCC:ETH-USD), and so on in recent years are now making moves on stocks on the New York Stock Exchange and even the precious metal silver.
Reddit Uprising Loses Steam
For the past week or so, it appeared that the Reddit traders were winning in their fight against traditional Wall Street institutions. However, the tables have turned recently. GameStop stock crashed back below $100 and continues moving lower. Many other so-called meme stocks are plunging with it.
A glance around the r/WallStreetBets forum now will find a much less jubilant tone.
That rise in concern may spread to the Bitcoin market as well. The cryptocurrency has been on a nearly straight-up run for many months now, surging from $10,000 to more than $40,000 at one point. That’s simply a tremendous move. And it gave the winning traders confidence to pursue more aggressive trades in other markets, such as in shares of GameStop and AMC Entertainment (NYSE:AMC).
With losses starting to pile up in those names, however, young traders’ overall risk appetite may start to decline. That’s doubly true considering that, reportedly, the Securities and Exchange Commission (SEC) is investigating the recent trading in various stocks championed in r/WallStreetBets.
Tether: A Ticking Time Bomb?
As if that weren’t enough, a major logistical piece of the cryptocurrency trading environment, the Tether coin, is under fire. An article posted a few weeks ago took the internet by storm. The anonymous author raised startling concerns about the safety and security of Tether, a so-called “stable coin” used in place of dollars on crypto exchanges that lack access to U.S. dollar banking.
The author pointed out numerous shortcomings in the story around Tether, such as a supposed lack of bank deposits to support Tether’s value. This is of vital concern, as Tether is the primary day-to-day vehicle that drives a massive chunk of Bitcoin trading. If Tether should stop functioning normally, it could cause a flash crash for the price of Bitcoin.
Making matters even more spicy, the Department of Justice is currently investigating Tether, and new information from their inquiry could surface at any time.
Bitcoin Verdict
There’s a compelling long-term investment case for Bitcoin. I won’t argue that. However, as a trade, this is a dangerous moment for the crypto space. Many of crypto’s most passionate investors just experienced gut-wrenching volatility from trading the Reddit stocks.
On top of that, the excitement in GameStop has attracted heavy government scrutiny. When investigators go looking through trading communities, they may find unflattering information about crypto dealings as well. On top of that, you’ve got an active Department of Justice investigation into a main funding vehicle for the crypto trading space, Tether.
Add it all up and there are a bunch of things that could go wrong for Bitcoin in the short term. However, the price of Bitcoin hasn’t reacted yet. In fact, Bitcoin is still fairly near its all-time high. As such, this could be a good time to lock in some gains. As we’ve seen with GameStop and AMC, once the meme magic ends, these sorts of trades can absolutely plummet within the space of a few days.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.
