Even though we have seven months left in 2021, theres little question that this is going to be remembered as the year retail investors made their presence known.
Beginning in January, retail investors on Reddits WallStreetBets chatroom began piling into stocks with high levels of short interest, with the sole purpose of effecting a short squeeze. Since a majority of short-sellers are institutional investors, this trade took on the feel of a David vs. Goliath battle.
And its not just equities that have been whipsawed wildly by retail traders. Cryptocurrencies have rocketed higher this year, with retail investors exerting a lot of influence on crypto exchanges.
Image source: Getty Images.
AMC and Dogecoin are blatant pump-and-dump schemes
The result is that weve witnessed plenty of stocks and digital currencies head to the moon -- many of which have no business whatsoever being valued where they are.
At the forefront of this retail movement are movie theater chain AMC Entertainment (NYSE:AMC) and cryptocurrency Dogecoin (CRYPTO:DOGE). While investors in AMC and Dogecoin would like to believe there are tangible reasons behind their respective moves higher, there arent. Theyve both been driven by a combination of hype, ignorance of fact, and the spread of misinformation.
In other words, AMC and Dogecoin are nothing more than pump-and-dump schemes in action. Thats where investors -- especially early investors -- use exaggerated and false claims to drive up the price of an asset. Its impossible to tell when these schemes will implode, but history is crystal clear that bubbles like these burst 100% of the time and end with hefty losses for momentum-chasing investors.
The big question is: Which of these two, AMC or Dogecoin, is the biggest pump-and-dump scheme at the moment? Lets have a closer look.
Image source: Getty Images.
Why AMC Entertainment is a pump-and-dump stock
Reddit traders whove piled into AMC have done so for one reason: They believe institutional investors have been playing dirty by short-selling AMC and are looking for the mother of all short squeezes, as they put it. As a reminder, short squeezes are usually very short-term events where pessimists who feel trapped in their positions buy to cover their shares held short. When a lot of pessimists head for the exit at once, it can create a very temporary spike in a companys share price.
Unfortunately, there are a lot of things wrong with AMC. It starts with retail investors purposely ignoring the companys fundamentals (i.e., its operating performance and balance sheet). Retail traders will say that fundamentals are irrelevant to a short squeeze, but history has proven 100% of the time that fundamentals always matter when it comes to long-term valuation. Historically speaking, betting on short squeezes has been a suckers bet.
A few of the problems with AMC include:
- A 19-year decline in movie ticket industry sales.
- A more-than-doubling in its net interest payments on corporate borrowings in the first quarter. AMC has virtually no chance of paying back its debts when they come due in 2026.
- Deferred rent obligations of $473 million.
But you wont hear about any of these things from retail investors, because it would damage their thesis.
Instead, retail traders have taken to Reddit and Twitter to spread misinformation about the role institutional investors have played with AMC and to perpetuate wild conspiracy theories of how the investing world works. Theyve claimed hedge funds tried to bankrupt AMC, and that the share price will rise because retail traders now control the float. Neither statement is accurate. Company actions and operating results determine whether a company goes bankrupt or succeeds, no matter how many hedge funds short it or how many retail traders own it.
Its impossible to tell when the hype train will derail, but it eventually always does.
Image source: Getty Images.
Why Dogecoin is a pump-and-dump crypto asset
But AMC isnt alone. Retail investors in the crypto space are also attempting to pull the wool over unsuspecting investors eyes with their own combination of hype, ignorance of fact, and misinformation surrounding meme-based cryptocurrency Dogecoin.
Dogecoin enthusiasts have bet the farm on the idea that Dogecoin has lower transaction fees than the Big Two in crypto (Bitcoin and Ethereum), and that Dogecoin will benefit from increased adoption. Tesla CEO Elon Musk has also regularly voiced his support for Dogecoin on Twitter.
The problem is that theres nothing tangible in its sails. As an example, proponents of Dogecoin like to talk up its increased adoption, but theyll fail to mention that its 50,000 transactions handled daily dont even move the needle next to the 700 million payments processed by Visa and Mastercard combined on a daily basis. Theyll also tell you to get in early on Dogecoin before businesses start accepting it, but will leave out that in eight years only 1,300 businesses have chosen to allow it as a form of payment.
Whats more, Dogecoin supporters talk up its lower transaction fees but leave out some other important details. For instance, that Dogecoins transaction fees are substantially higher than the likes of Stellar, Nano, Ripple, Dash, Ethereum Classic, and Bitcoin SV, just to name a few, or that its validating and settlement speeds are considerably slower than many of these popular networks (including Bitcoin).
The only real catalyst for Dogecoin (and Im sorry to say this) is tweets from Elon Musk. Imagine your entire investment thesis being based on the hope that Elon Musk posts a meme or mentions Dogecoin in a tweet. Suffice it to say, Dogecoin investors are constantly having to hype it up on social media platforms to keep the price from collapsing.
Image source: Getty Images.
And the biggest destroyer of future wealth is...
Now its time to answer the original question: Which of these two, AMC or Dogecoin, is the bigger pump-and-dump scheme?
As you can probably tell, I like neither company as an investment. If I had to choose the two most-dangerous places to put your money to work (and I mean dangerous in a negative context), it would be AMC and Dogecoin. But when it comes to which is a bigger pump-and-dump scheme, Dogecoin takes home the crown.
Why? The simple answer is that AMC has income statements, balance sheets, and industry trends that can be pored over to make reason-based investment decisions (even if todays traders choose to ignore that tangible data). Its also previously been a profitable company and could be so again in 2024 or beyond. Its even possible that AMCs management team gains concessions in the future that allow for more shares to be issued, which would help the company reduce its debt load and take a potential bankruptcy by or before 2026 off the table.
Dogecoin has none of this. Its transaction costs arent particularly low next to some other major blockchains, and its slow processing speeds leave a lot to be desired. Very few businesses are accepting Dogecoin, and its entire run-up is based on tweets from Elon Musk. If thats not the dictionary definition of a pump-and-dump scheme, then I dont know what is.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.Sean Williams owns shares of Mastercard. The Motley Fool owns shares of and recommends Bitcoin, Mastercard, Tesla, Twitter, and Visa. The Motley Fool has a disclosure policy.>
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