WSJ: We spoke with the "fallen retail investors" behind the new wave of meme frenzy

Authors: Hannah Miao, Gunjan Banerji

Source: The Wall Street Journal

The U.S. stock market is filled with "degenerates."

Driven by amateur traders who call themselves "degens," a high-risk trading style is making a comeback. These traders are enthusiastic about high-risk trades that are notorious for having no relation to traditional investment evaluation methods. Some are willing to throw large amounts of cash into specific stocks or cryptocurrencies just to participate in a trend. Others are simply there for the thrill and the memes.

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

These self-proclaimed "degenerates" use online aliases to boast in chat rooms about their purchases of obscure digital tokens, meme stocks, and speculative options contracts. They often prioritize the thrill of such trades over the fundamentals of these assets. Such trading can yield profits almost immediately, but if the bets fail, it can also lead to massive losses.

"Degens" are one of the driving forces behind the "meme stock frenzy," such as the recent illogical movements of GameStop stock in the past few weeks. When these internet-driven traders band together, it can lead to significant price fluctuations in assets. All it takes is for a meme to catch fire.

In May of this year, as everything from major indices to meme stocks soared, social media saw a surge of mentions of "degenerates" and "degen trading." According to Hootsuite's social media performance engine, mentions of "degen" and its variants exceeded 370,000 on platforms like Reddit and X, compared to fewer than 1,000 in April.

"This money comes fast," said 39-year-old former professional poker player Daniel Moravec, who identifies as a "degen trader." "Buying some options or high-risk stocks is better than buying a lottery ticket."

During the COVID-19 pandemic, people stayed home and received extra cash from stimulus programs, leading to an explosive growth in short-term trading. Apps like Robinhood made trading simple and fun, while brokers across the industry eliminated commissions and offered fractional shares, making investment costs lower than ever.

Today, the targets for investors' bets are all-encompassing, from digital tokens with no apparent value to high-risk options that could become worthless in minutes or hours. Robinhood launched 24-hour trading last year and increased the number of stocks available for overnight trading this year, allowing degenerate traders to easily invest in stocks around the clock and try to catch certain stock trends.

A trader named Keith Gill has become the ultimate hero for many degenerate traders, although he identifies as a value investor. His online nicknames are "Roaring Kitty" or "DeepF------Value." In 2021, he made a massive bet on GameStop and shared his investment insights online, leading a meme stock revolution. Newbie investors flocked to his side, driving the stock price of the struggling video game retailer to soar. They caused significant losses for hedge funds that shorted the stock, drawing the attention of Congress, regulators, and Wall Street. Gill's last post on Reddit in 2021 showed that his holdings in GameStop had risen to about $30 million.

Since then, trading volumes at brokers have fallen from the highs seen during the pandemic. Many short-term traders have returned to their daily jobs.

Some on Wall Street wonder if the meme stock craze is just a flash in the pan. But die-hard fans remain loyal. Along the way, parts of the market have become indistinguishable from a casino.

Last month, "Roaring Kitty" reappeared on the X platform, reigniting trading frenzies for GameStop and other meme stocks. On Sunday, an account associated with Gill shared a screenshot showing a position in GameStop exceeding $180 million, sparking a new round of rollercoaster trading. Over the past month, the stock has more than doubled.

Although the odds are slim, the bets related to GameStop and other stocks favored by degenerates have surged, bringing the average daily options trading volume to nearly 47 million this year, the highest level recorded by the Options Clearing Corp. since 1973. Most of these activities are concentrated in short-term trading, where investors can either make a fortune or lose everything.

For example, data from Cboe Global Markets shows that if traders bought options linked to GameStop's rise to $20 before the recent stock market surge, the return could exceed 2,000%.

Data Source: Options Clearing Corp.

The U.S. stock market has been on a roll, with the S&P 500 index posting an annualized return of nearly 11% over the past decade. Meanwhile, the nearly risk-free yield of many money market funds is around 5%, among the highest levels in over a decade.

Despite this, some degenerates say that the returns from such mundane investments are far from sufficient. They crave more substantial profits and hope that a big win can bring significant changes to their lives.

Although data shows a strong U.S. economy, inflation has driven up grocery prices and rental costs. The Federal Reserve's approach of raising interest rates to curb inflationary pressures has also pushed up mortgage rates.

Young people, in particular, feel the pinch of record-high housing prices and mounting student debt, with some worrying they will never earn enough to reach the milestones achieved by the previous generation. Long-term surveys of young Americans show that the disillusionment of Generation Z after emerging from the pandemic exceeds that of any previous living generation.

32-year-old Matt Kielczewski said he started investing in cryptocurrencies in 2017, drawn by the "promise of financial freedom." At that time, he had opened an account on Coinbase to buy tickets for a solar eclipse festival, needing to pay in Bitcoin. The remaining $10 in his account turned into $100 six months later.

"That's when I had an epiphany," he said. "This magical internet currency is changing people's lives."

Kielczewski was making a living as an underground DJ in Colorado when the pandemic wiped out his income. Now, he works in marketing in the cryptocurrency industry and lives in Lisbon.

Initially, degen trading made him feel like he belonged to an organization with a purpose greater than himself: a community of like-minded individuals. Since then, he has grown concerned about scams, and now sees "the immense toxicity that exists in this space." He still trades weekly but has shifted to a buy-and-hold strategy for cryptocurrencies.

According to cryptocurrency data provider CCData, trading volume on centralized exchanges surged in March, reaching an all-time high. This includes trading in Bitcoin and the degens' investments in so-called meme coins; these meme coins are created for fun and often reference popular internet inside jokes. Earlier this year, a cryptocurrency called Dogwifhat, linked to a virtual image of a Shiba Inu wearing a pink hat, was worth just a few cents, but its recent trading price is around $3.36, an increase of over 2,000%. There is even a Degen coin that has also seen significant price fluctuations.

So far this year, the proportion of low-priced stocks in U.S. stock trading has also increased, rising to 14% by the end of May, the highest level recorded by Cboe Global Markets since 2016.

Note: Data for 2024 is as of May. Data Source: Cboe Global Markets

Degenerates and their ilk are also flocking to online sports betting. The National Collegiate Athletic Association surveyed 3,527 individuals aged 18 to 22 last year and found that 67% of students living on college campuses had engaged in sports betting.

It is difficult to pinpoint where the term "degen" originated or how many traders identify with it. Many say it was first adopted by the cryptocurrency community and then expanded to other markets. Some first saw the term during the "DeFi Summer" of 2020, when a large influx of capital entered the decentralized finance components of the cryptocurrency world.

What is clear is that this term and this trading style are gaining popularity. As mentions of "degenerates" and "degen trading" surged online in May, data from J.P. Morgan Global Quantitative and Derivatives Strategy showed that the proportion of options activity from retail investors soared to over 18% that month, the highest level at least since August 2020.

Traders might say they are "degening" (betting like gamblers) on things like meme coins. This is similar to how some traders refer to themselves as "apes" or say they are "aping" (blindly following bets) into a certain asset. Uniting and coordinating trades on platforms like Reddit or Discord is seen as a bold move. Those who dare to take such big risks are celebrated by their peers.

"In internet slang, 'degen' is really just a nickname," said 41-year-old anesthesiologist assistant Dustin Burnham from Melbourne, Florida. "It implies a willingness to take risks that others wouldn't take to achieve a goal."

Burnham said he does not consider himself a degenerate investor, but he is active in some communities filled with ape emojis.

Few retail investors manage to earn even a small fraction of the wealth that Gill seems to have gained. An academic study in 2023 found that many retail investors wasted money on trades in the options market, ultimately losing money, especially around events like earnings releases. Many investors also failed to time their cryptocurrency investments well. For instance, new users flocked in before and after cryptocurrency prices peaked in 2021, with some suffering huge losses in the subsequent crash.

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

After the GameStop saga in 2021, the Securities and Exchange Commission (SEC) proposed setting up guardrails related to trading apps to curb what regulators see as the gamification of trading. So far, such measures have faced strong opposition from the brokerage industry and Congress.

Maria Paula Fernandez, 38, who lives in Berlin and started trading cryptocurrencies in 2017, is now a professional in the cryptocurrency industry. Her home country of Argentina has restrictions on foreign currency, making the freedom and transparency promised by cryptocurrencies very appealing to her.

While she has engaged in quite a bit of meme coin trading and enjoys looking for fun in the market, she is skeptical of the "degen" spirit.

"It ultimately affects the way you view things. You no longer see some things as financial instruments," she said. "You just get sucked into this microculture."