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Original title: "We talked to the "degenerate retail investors" behind the new round of meme stock craze"

Original article by Hannah Miao and Gunjan Banerji, THE WALL STREET JOURNAL

The U.S. stock market is full of "degenerates."

A high-risk trading style is making a comeback, fueled by amateur traders who call themselves "degens." These traders engage in high-risk trades that are known to have little to do with traditional ways of evaluating investments. Some people are willing to invest large sums of cash into specific stocks or cryptocurrencies just to get in on a trend. There are also some people who just want to watch the excitement and make jokes.

In their language, "Degen" can be a noun, adjective or verb, and is popular mainly among young people. It is a self-deprecating identity that some trace back to the term "degenerate gambler". Behind it is a spirit that advocates bold bets on the market and questions investment norms: you only live once, so why bother with traditional financial advice?

Using online pseudonyms, the self-proclaimed “degenerates” boast in chat rooms about buying obscure digital tokens, meme stocks and speculative options contracts, often favoring the thrill of such trades over the underlying fundamentals of the assets. Such trades can lead to almost immediate profits, or huge losses if the bets go wrong.

The Fallen are one of the factors driving the “meme stock frenzy,” such as the counterintuitive move in GameStop shares in recent weeks. When these internet-powered traders band together, they can cause big swings in asset prices. All it takes is for a meme to catch fire.

In May, as everything from major indexes to meme stocks surged, social media references to “faller” and “faller trading” exploded. According to Hootsuite’s social media performance engine, “faller” and its variations have been mentioned more than 370,000 times across social media platforms including Reddit and X, up from less than 1,000 in April.

“It’s quick money,” said Daniel Moravec, a 39-year-old former professional poker player who calls himself “The Degenerate Trader.” “It’s better to buy some options or risky stocks than to buy lottery tickets.”

Day trading has exploded during the coronavirus pandemic as people stay home and get extra cash from stimulus checks. Apps like Robinhood have made trading easy and fun, while across the industry, brokers have eliminated commissions and offered fractional share trading, making investing cheaper than ever.

Today, investors are betting on everything from digital tokens that they know have no underlying value to risky options that could become worthless in minutes or hours. Robinhood launched 24-hour trading last year and this year added stocks that trade overnight, making it easy for degenerate traders to invest in stocks around the clock and try to catch the action of certain stocks.

An Internet trader named Keith Gill became the ultimate hero to many fallen traders, but he called himself a value investor. His online nickname is "Roaring Kitty" or "DeepF——Value", and in 2021 he led a meme stock movement by betting heavily on GameStop and posting his investment information online. revolution. Novice investors jumped on his bandwagon, sending shares of the struggling video game retailer soaring. They inflicted heavy losses on hedge funds that bet against the stock, drawing the attention of Congress, regulators and Wall Street. Gill's last post on Reddit in 2021 showed the value of his GameStop stock holdings had risen to about $30 million.

Since then, brokerage volumes have retreated from their COVID-19 highs. Many day traders have returned to their day jobs.

Some on Wall Street wondered if the meme stock craze was just a passing fad. But die-hard fans stuck with it. Along the way, parts of the market have become like casinos.

Last month, the "roaring Hello Kitty" reappeared on the X platform, once again igniting a trading frenzy in GameStop and other meme stocks. On Sunday, an account associated with Gill shared a screenshot on Reddit showing a position of more than $180 million in GameStop, setting off a new round of roller coaster market. The stock has more than doubled in the past month.

Despite the long odds, bets tied to GameStop and other stocks favored by degenerate traders have surged, pushing the average daily volume of options this year to nearly 47 million, the highest level in the history of Options Clearing Corp. data going back to 1973. Much of the activity is in short-term trades that can make or break investors.

For example, if traders had bought options tied to GameStop’s jump to $20 before the recent stock market rally, returns could have exceeded 2,000%, according to Cboe Global Markets.

Data source: Options Clearing Corporation

U.S. stocks have been roaring back, with the S&P 500 index posting an annualized return of nearly 11% over the past decade. Meanwhile, many money-market funds are offering near-risk-free yields of around 5%, among the highest in more than a decade.

Still, some of the fallen say the rewards from this more boring investment are not enough. They are eager for bigger profits and hope that a big win will bring substantial changes to their lives.

While data shows the U.S. economy is strong, inflation has increased grocery prices and rental costs. The Federal Reserve’s efforts to curb inflationary pressures by raising interest rates have also pushed up mortgage rates.

Young people are particularly hurt by record-high housing prices and mountains of student debt, and some worry they will never make enough money to reach milestones reached by previous generations. Long-term surveys of young Americans show that Generation Z is emerging from the COVID-19 pandemic more disillusioned than any previous generation still alive.

Matt Kielczewski, 32, said he started investing in cryptocurrencies in 2017 because he was attracted by the "promise of financial freedom." He had opened an account at Coinbase to buy tickets for a solar eclipse festival, which he needed to pay for with Bitcoin. The $10 left in his account turned into $100 six months later.

“That’s when I had an epiphany,” he said. “This magical internet currency was changing people’s lives.”

Kielczewski was making a living as an underground DJ in Colorado when the coronavirus outbreak wiped out his income. He now works in marketing for the cryptocurrency industry and lives in Lisbon.

At first, Faller trading made him feel like he belonged to something bigger than himself: a community of like-minded people. That’s when he started to worry about scammers, and now he sees “the huge toxicity that exists in this space.” He still trades weekly, but now takes more of a buy-and-hold approach to crypto.

Cryptocurrency trading volumes on centralized exchanges surged in March, reaching an all-time high, according to cryptocurrency data provider CCData. This includes trading in Bitcoin, as well as degenerate investments in so-called memecoins; these are created for fun and often refer to inside jokes popular online. A cryptocurrency called Dogwifhat, tied to the avatar of a pink-hatted Shiba Inu, was worth just a few cents at the start of the year, but has recently been trading around $3.36, a gain of more than 2,000%. There is even a Degen coin, which also fluctuates wildly in value.

Low-priced stocks have also increased their share of U.S. stock trading this year, rising to 14% by the end of May, the highest level since Cboe Global Markets data began in 2016.

Note: Data for 2024 is as of May

Data source: Cboe Global Markets

Degenerates and their ilk are also flocking to online sportsbooks. The National Collegiate Athletic Association surveyed 3,527 people aged 18 to 22 last year and found that 67% of students living on college campuses have placed a sports bet.

It’s hard to pinpoint exactly where the term “degen” originated, or how many traders would classify themselves as such. Many say it was first adopted by the crypto community and then expanded to other markets. Some began seeing the term during the “DeFi Summer” of 2020, when a large amount of money poured into the decentralized finance component of the cryptocurrency world.

It is obvious that this term and this trading style are gaining popularity. As the number of mentions of "degenerate" and "degenerate trading" on the Internet increased significantly in May, data from J.P. Morgan Global Quantitative and Derivatives Strategy showed that the proportion of options activity originating from retail investors soared to 18 in that month. %, the highest level since at least August 2020.

Traders might say they are "degening" (betting like a gambler) something like a meme coin. This is similar to how some traders call themselves "ape" (ape), or say they are taking a large position or "aping" (mindlessly following the trend) on an asset. It is a sign of bravery to unite and coordinate trades on platforms such as Reddit or Discord. Those who dare to take such big risks are admired by their peers.

“In online lingo, ‘fall guy’ might actually be a nickname,” said Dustin Burnham, 41, an anesthesiologist assistant in Melbourne, Florida. “It might imply a willingness to take risks that others wouldn’t take to achieve a goal.”

Burnham said he doesn't consider himself a corrupt investor, but he is active in some communities filled with ape emojis.

Few retail investors have made even a fraction of the wealth that Gill appears to have amassed. A 2023 academic study found that many retail investors overpaid for trades in the options market and ended up losing money, especially around events like earnings releases. Many investors also failed to time crypto well. For example, new users flocked to crypto around the peak in 2021, and some suffered huge losses in the subsequent crash.

Data source: J.P.Morgan Global Quantitative and Derivatives Strategy

In the wake of the GameStop drama in 2021, the Securities and Exchange Commission (SEC) proposed guardrails related to trading apps to curb what regulators see as the gamification of trading. Such moves have so far been met with strong opposition from the brokerage industry and Congress.

Maria Paula Fernandez, 38, a Berlin-based cryptocurrency trader, has been trading cryptocurrencies since 2017. Her native Argentina has restrictions on foreign currencies, so the freedom and transparency promised by cryptocurrencies appealed to her.

While she does a fair amount of memecoin trading and enjoys the market for fun, she is skeptical of the Fallen ethos.

“It ends up affecting the way you look at things. You stop looking at things as financial instruments,” she said. “You just get sucked into this micro-culture.”