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The Crypto Recovery Might Be Bad News for GameStop

I think I speak for many of my colleagues when I say that discussing meme stocks is becoming more of a chore than a willing endeavor. Nevertheless, market demand dictates that we discuss companies like GameStop (NYSE:GME). Love it or hate it, GME stock sparked a revolution on Wall Street and thus, by that fact alone, it deserves respect.

A Gamestop video game store in the Herald Square shopping district in New York

Source: rblfmr / Shutterstock.com

But whether a prospective buyer should get involved with shares of the video game retailer is another matter. Without getting into too many gory details, the mass sentiment for GME stock can be off-putting for conservative investors. Browse social media posts and mixed in with the occasional useful nuggets are various short clips from popular movies egging fellow “apes” to hold the line.

From an elemental level, the narrative for GME stock sounds appealing: this is the little guy taking on the oppressive giant that is Wall Street hedge funds. But as InvestorPlace contributor Wayne Duggan explained, reality represents a cruel slap in the face (although perhaps a necessary one for those who may be getting a little too carried away).

“The reality is that every struggling company has a turnaround plan. If management doesn’t have a plan, they lose their jobs,” Duggan wrote. He further added, “Turnaround plans almost never work. Yes, there are exceptions. But why would you invest in a rare exception when you could invest in the rule?”

That’s a great point. Basic economic principles might also impose a headwind on GME stock. We live in a world of limited resources. Therefore, when retail buyers move into particular trades en masse, other investment categories may falter.

Moving forward, prospective GameStop speculators should think about this before making their decision.

Why the Math Might Not Work for GME Stock

As I’m writing this, I’m watching the cryptocurrency sector explode higher, with several digital assets — even the extremely speculative or questionable ones — apparently on the cusp of challenging their prior highs. It’s all good news if you’re a crypto proponent, but I have one question: where’s all this money coming from?

The easy answer is institutional money, which is moving into the blockchain sphere, thereby legitimizing it. As a result, the retail buyers are following suit, sniffing a possibly great opportunity. But if that’s the case, that would likely mean the bulls would have to unload something to get involved in this crypto rally.

After all, the prices of these digital assets have jumped exponentially higher from a year ago. Thus, more funds are necessary to move this weight, if you will. And that poses problems for GME stock.

While there’s no exchange-traded fund that I’m aware of that focuses exclusively on meme stocks, the closest equivalent is SoFi Social 50 ETF (NYSEARCA:SFYF), which holds several popular names. Comparing SFYF to blockchain and crypto-friendly Amplify Transformational Data Sharing ETF (NYSEARCA:BLOK) reveals an interesting dynamic.

In the months leading up to 2021, the price action of SFYF and BLOK shared a strong direct correlation coefficient of around 95%. But from January 2021 onward, the correlation went negative to 17% under zero. Why is that?

In my opinion, before the meme stock phenomenon, traders simply traded based on their personal beliefs. Following the memes, however, the amount of retail money pouring into popular stocks took on a life of its own. At the same time, retail money also went into cryptocurrencies.

Buyers couldn’t sustain extraordinary valuations in both sectors, so something had to give. I find it curious that as cryptos suffered their decline, social-media-driven stocks generally kept rising higher.

Tread Carefully if Cryptos Really Take Off

Now, I can’t be for certain that the rise of cryptos will impose a headwind for GME stock. Perhaps the digital asset rally is just based on institutional money or whales or sophisticated private investors outside the realm of regular retail buyers. But invariably, even with the affluent trader class, we still live in a world of limited resources.

Therefore, if cryptos continue to jump higher — and that’s a very real possibility now — the smarter approach may be to stay on the sidelines for GME stock. In fact, that’s what I’m doing. Currently, I own shares, but I’m playing with house money. But I’ll tell you this much: you’re not going to see me add to my GameStop holdings.

Again, it’s just too risky. In the crypto realm, you have popular coins and tokens that are not only selling for fractions of a penny, they’re selling for fractions of a fraction of a fraction of a penny. Given mainstreamed stories of speculators making it rich, it’s almost invariable that if digital assets as a whole continue to soar, these low-cost cryptos will attract the retail crowd.

That’s great for digital assets but not so great, unfortunately, for GME stock.

On the date of publication, Josh Enomoto held a LONG position in GME. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.

Article printed from InvestorPlace Media, https://investorplace.com/2021/08/gme-stock-might-soon-become-victim-of-own-success/.

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