Hey, welcome to another article that talks about the famous scam often seen in the stock and crypto market.
Before diving into it, we all know the reason behind stock going up/down – which is simply because of demand and supply. Like any other commodity in this world – if more people want to buy something and supply is finite, demand increases steadily which shoots up the value often called cost. You can say “Ah, this is obvious, don’t waste my time” – you are right, but think why do people want to buy something in the first place.
Assume we want to buy M company stock/M coin. Let’s write down some possible scenarios behind that want-
- You like the company, strongly believe in what they are doing and think that the company would create more business/wealth in future
- You don’t know the company, but some known basic finance metrics of the company look decent. It has got a giant scope/share of business in that respective sector.
- You neither know about the company nor how it is doing financially but still, want to buy because someone/some forum/app insists you buy it. You may also have heard it will grow to some arbitrary number much higher than the current value based on some lame speculation.
In the above three scenarios, first two scenarios are based on little research and some instinct which is far better than the last scenario. This article is not about trying to convince you not to take anyone’s advice on stock/crypto, rather it is more about taking everything with a pinch of salt. Let’s look at history – always the best teacher.
Meme stocks
We can never forget the year 2020, the covid pandemic hit the world like never seen before. Everyone was sitting in their home, and money got deposited into their account by govt as stimulus checks. A lot of trading apps like Robinhood gained massive popularity as people started their active investing journey.
Meanwhile, a sub on Reddit – r/wallstreetbets and other social media platforms started bloating stocks to moon despite the bad financials. The surging prices of stocks were too tempting to pour money than to take time to think. Many convinced themselves to buy those stocks and started referring them as – “undervalued” stocks. The most famous meme stocks in that period were AMC and Game Stop whose stock prices got ridiculously over-valued by all means.
Crypto
The Crypto industry is also filled with stories like this. Every other week a new coin used to get launched, and people start creating a buzz around this coin, saying this is going to replace every other coin in the market. Personally, I feel it became more of an investment recently than the revolutionary replacement of traditional money/system.
During this period, any event relating to the buzzing stock/company was enough to surge the price of the stock making it more and more volatile. This sudden and bulged price increase results in PUMP!
People who invested at the beginning of this scheme and sold during the pump are the luckiest and maybe the smartest. And people who bought them during the peak of the pump due to FOMO are the prey and they tend to lose money within no time – because once it reaches the peak (no one knows the peak), people will start dumping it.
Leading to – DUMP!
Here, to get hold of the timing right is crucial to be on the earner’s side, and often depends on luck. You can just say this is trading and losing/gaining money is a common phenomenon. But there is a wide misconception between trading and investing. I will end with a simple analogy from cricket to make the difference clear:
Investing is putting money into a batsman’s career believing in his potential and skill, and understanding how different his techniques and style are from other contemporaries. Trading is betting that that batsman will score ‘x’ runs in a match which is difficult to predict, one may say – it can still be guessed from match day weather, pitch, his track record on the opposite team, and other factors, but there is a lot more luck involved than you can think as they are many other factors involved that are out of prediction limits or never known.
I hope this article has been of some use to you, take care!
engineeringvsme 