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Power to the Players: Reddit, Robinhood and Bitcoin

Summary:
Those of you with kids and grandkids may at some point have stepped inside a GameStop. If so, you might be familiar with the video game retailer’s tagline: “Power to the players.” The same slogan could just as easily be the rallying cry for the millions of millennial and Gen Z Reddit-users who took to Robinhood this week to drive up the share price of the beloved yet struggling GameStop. (Fun fact: Ross Perot was one of the earliest seed investors in GameStop’s predecessor, Babbage’s, which first opened its doors in Dallas, Texas, in 1984.) By now you’ve likely heard the full story. But just in case: A number of hedge funds, including Melvin Capital and Maplelane Capital, took out short positions in GameStop, whose sales were lagging even before the pandemic killed foot traffic. In

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Power to the Players: Reddit, Robinhood and Bitcoin

Those of you with kids and grandkids may at some point have stepped inside a GameStop. If so, you might be familiar with the video game retailer’s tagline: “Power to the players.”

The same slogan could just as easily be the rallying cry for the millions of millennial and Gen Z Reddit-users who took to Robinhood this week to drive up the share price of the beloved yet struggling GameStop.

(Fun fact: Ross Perot was one of the earliest seed investors in GameStop’s predecessor, Babbage’s, which first opened its doors in Dallas, Texas, in 1984.)

By now you’ve likely heard the full story. But just in case: A number of hedge funds, including Melvin Capital and Maplelane Capital, took out short positions in GameStop, whose sales were lagging even before the pandemic killed foot traffic. In response, anti-Wall Street organizers on Reddit urged readers to buy GameStop options en masse to catapult its shares “to the moon.” This in turn forced Melvin and others to buy GameStop shares at much higher prices to cover their positions, leading to multibillion-dollar losses.

This month alone, GameStop surged from around $19 a share to $325—a more-than 1,600% increase. The stock traded a head-spinning $100 billion worth of shares this week, more than Apple and Amazon, according to Bloomberg’s Eric Balchunas.

To traders who genuinely care about the company’s survival, I would suggest they consider supporting it by spending their money there this weekend.

The Reddit-fueled rally has drastically impacted price discovery in not just GameStop but other underdog stocks as well. Shares of movie theater operator AMC Entertainment, home goods retailer Bed Bath & Beyond, BlackBerry and Tootsie Roll Industries have also popped. Even Blockbuster’s liquidation holding company saw surreal levels of trading, its daily volume jumping from zero just a month ago to nearly 24 million shares on Thursday.

Power to the Players: Reddit, Robinhood and Bitcoin
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Gil Scott-Heron, considered by many to be the first rap artist, informed us back in 1971 that “The Revolution Will Not Be Televised.” 

That may be so, but it will be tweeted, shared on Instagram, upvoted on Reddit and traded on commission-free Robinhood using decentralized Bitcoin and Ethereum. “Power to the players” indeed.

In Support of Democratizing Capital Markets

No matter where your opinion falls in all of this, you can’t deny that it’s historic. To my knowledge, nothing like this has ever happened before in capital markets, where millions of small traders, many of them using their $600 stimulus checks, worked in tandem to cripple wealthy institutional investors, leveraging their very own trading strategies against them.

In the process, a number of these traders have made life-changing amounts of money.

Let me be very clear: I’m in favor of Robinhood’s mission to democratize capital markets and finance, but like democracy itself, things can sometimes get messy. What the Redditors are doing is not investing. This isn’t the same as Robinhooders buying airline stocks after Warren Buffett dumped his positions in the big four carriers.

It isn’t even speculation. It’s activism—think of it as a type of anti-Wall Street “Arab Spring”—and I fear that some young people may get hurt when the bottom falls out.

Robinhood clearly felt the same when it halted trading in some of the heavily shorted stocks (and, on Friday, as many as 50 other stocks). The company, whose tagline is “Investing for Everyone,” tried to clarify its decision in an email this week, saying the temporary restriction “was not made on the direction of any market maker we route to or other market participants.”

Robinhood also emphasized its longstanding mission to open the capital markets up to a greater share of people, including younger and nontraditional investors:

The past year in particular has shown us that the financial markets are for everyone—not just institutional investors and hedge funds… Democratizing finance for all means giving more people access, not less.

Dalio: Bitcoin Is “One Hell of an Invention”

That brings me to Bitcoin, Ethereum and the crypto ecosystem in general, which is likewise democratizing finance. When you use a card to pay for your Starbucks, there’s a third party standing between you and the transaction. With Bitcoin and Ethereum, payments are peer-to-peer, open and free to move across borders.

For this reason and more, Ray Dalio this week called Bitcoin “one hell of an invention.”

In a blog post dated January 28, the Bridgewater founder wrote that it’s an “amazing accomplishment” that Bitcoin has been “rapidly gaining popularity as both a type of money and a storehold of wealth.” He added that, to him, Bitcoin looks like an attractive long-term option that he could one day put money in.

Dalio’s comment, I believe, underscores the reality that cryptos are rapidly going mainstream—as an investment, as stores of value and as currencies. It’s no longer just speculators who are participating, but well-known, highly respected investors and organizations.

Last week, in fact, inflows into cryptocurrency funds and products hit a new record of $1.31 billion, according to CoinShares. So far this year, Bitcoin has seen average daily trading volume of $12.3 billion, up significantly from $2.2 billion last year.

Another sign that Bitcoin is growing in popularity: The number of Bitcoin wallets that contained a positive balance reached a new record high in 2020, according to Coinbase’s 2020 in Review. An estimated 33.2 million wallets held Bitcoin, an increase of 16.8% from the previous year.

Power to the Players: Reddit, Robinhood and Bitcoin
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The Rise of DeFi, a Competitor to Traditional Financial Services

Decentralized finance (DeFi) also continued to grow in 2020. In short, DeFi has the potential to completely upend the traditional financial services industry by providing “global, programmatic, decentralized, 24/7/365 markets” for services as various as taking out loans, investing in derivatives, trading assets and buying insurance contracts. For the first time, financial product development has been put “directly in the hands of engineers, who no longer need to work at a bank and ‘ask permission’ to create products.”

According to Coinbase, there were 1.2 million DeFi users around the world taking advantage of these open-source systems. The number will only continue to grow.

Power to the Players: Reddit, Robinhood and Bitcoin
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I think one of the biggest signs that open-source technology is giving traditional finance a run for its money is that, today, a single Bitcoin is enough to purchase between 100 and 150 shares each of the big four U.S. banks. Compare that to five years ago, when one could only buy you about one share each.

Power to the Players: Reddit, Robinhood and Bitcoin
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We Were Early in the Crypto Ecosystem

Having said all that, I couldn’t be prouder to have helped bring HIVE Blockchain Technologies to market more than three years ago. It remains the only crypto miner that mines both Bitcoin and Ethereum.

Today, I’m pleased to say that HIVE ranked number four on the 2021 OTCQX Best 50, a ranking of top performing companies on the OTCQX Best Market based on 2020 total return and average daily dollar volume growth.

To get more of my thoughts on Bitcoin and Ethereum, watch my interview with Cointelegraph by clicking here!

Gold Market

This week spot gold closed the week at $1,847.65, down $7.96 per ounce, or 0.43%. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week lower by 2.04%. The S&P/TSX Venture Index came in off 2.68%. The U.S. Trade-Weighted Dollar rose 0.36%.

Date Event Survey Actual Prior
Jan-26 Hong Kong Exports YoY 8.4% 11.7% 5.6%
Jan-26 Conf. Board Consumer Confidence 89.0 89.3 87.1
Jan-27 Durable Goods Orders 1.0% 0.2% 1.2%
Jan-27 FOMC Rate Deision (Upper Bound) 0.25% 0.25% 0.25%
Jan-28 Germany CPI YoY 0.7% 1.0% -0.3%
Jan-28 GDP Annualized QoQ 4.2% 4.0% 33.4%
Jan-28 Initial Jobless Claims 875k 847k 914k
Jan-28 New Home Sales 870k 842k 829k
Jan-31 Caixin China PMI Mfg 52.6 53.0
Feb-1 ISM Manufacturing 60.0 60.5
Feb-3 CPI Core YoY 0.9% 0.2%
Feb-3 ADP Employment Change 60k -123k
Feb-4 Initial Jobless Claims 835k 847k
Feb-4 Durable Goods Orders 0.2% 0.2%
Feb-5 Change in Nonfarm Payrolls 50k -140k

Strengths

  • The best performing precious metal for the week was silver, up 5.86%. The Reddit day-traders discovered silver this week after sending GameStop and other stocks soaring. Comments appeared on Reddit on Wednesday calling the iShares Silver Trust the “biggest short squeeze in the world”, citing banks as manipulators of precious metal prices. On Thursday while the iShares Trust gained as much as 7.2% and spot silver up 6.8%, prop traders likely piled into the trade too to take advantage of the momentum change.

Power to the Players: Reddit, Robinhood and Bitcoin
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  • The World Gold Council (WGC) said in its 2021 outlook report that it expects gold demand to rebound from an 11-year low. Analysts say China’s economic recovery is already supporting an increase in gold jewelry demand. Gold consumption fell dramatically in 2020 due to record high prices and the pandemic taking a toll on economies.
  • Newmont Corp. retained its top spot in the ESG ranking of miners, according to London-based Alva. Diamond giant De Beers came in second and Rio Tinto Group improved its score from the prior year. Proving to investors they are making strides toward sustainability is growing in importance. ESG and value-focused exchange traded funds recorded net inflows of $89 billion in 2020, almost three times 2019 levels, according to Bloomberg Intelligence.

Weaknesses

  • The worst performing precious metal for the week was palladium, down 5.37%. Gold is set for its worst January in a decade. The U.S. dollar was supported by the Federal Reserve keeping its monetary policy unchanged of bond-buying at $120 billion per month. Bullion lost as much as 3% in January.
  • Precious metals ETFs saw big outflows the week ended January 28, with investors withdrawing $819.9 million. The SPDR Gold Shares had the biggest outflow of $55.1 million, according to data compiled by Bloomberg.
  • Fresnillo shares fell as much as 5.4% on Tuesday after RBC cited lower guidance as a key focus for the miner. Production forecasts for 2021 were 10% less than consensus and RBC analyst Tyler Broda said project delays need to be watched.

Opportunities

  • GV Gold PJSC, a Russian gold miner backed by BlackRock, has revived plans for an IPO and hopes for a valuation above $1 billion, reports Bloomberg. The miner is controlled by the owners of Lanta-Bank and has projects at several Siberian deposits. The company produced around 260,000 ounces of gold in 2019, ranking it among one of Russia’s biggest 10 miners.
  • Heraeus, a precious metals refiner, expects gold to hit a high of $2,120 an ounce this year due to stimulus efforts from central banks and a recovery in jewelry demand. In a report, Heraeus said it sees silver outperforming gold to top $36 an ounce and platinum could hit $1,200 an ounce.
  • Goldman Sachs says global demand is now above supply in every major commodity market, apart from cocoa and zinc. “As long as demand is above supply and inventories are drawing, commodity returns will continue to accrue,” analysts say. Silver remains the bank’s preferred precious metal as it benefits from both debasement and a green energy led industrial recovery.

Threats

  • Zimbabwe has reintroduced a controversial law that could force miners to sell majority stakes to local black investors, reports Bloomberg. Regulatory changes discussed last month would allow ministers of finance and mines the discretion to “prescribe” minerals that should be 51%-owned by indigenous investors. Zimbabwe holds the world’s third-largest known reserves of platinum-group metals, plus deposits of gold and diamonds. Investors have held back from spending on large projects even after the government appeared to soften the local ownership law in 2017. Such ownership laws deter foreign miners from operating in the country.
  • In more Zimbabwe news, mining companies said a central bank rule compelling them to surrender more foreign exchange earned from mineral exports will push operations toward unviability. Bloomberg reports that on January 8 the government announced exporters must give 40% of foreign currency earnings, up from 30%, which is then paid out in the local currency.
  • A growing chorus of big-name investors are throwing their weight behind Bitcoin, creating a threat to gold’s status as an alternative and “safe-haven” asset. Bridgewater Associates founder Ray Dalio said in a note this week that Bitcoin is “one hell of an invention” and said he’s considering crypto investments for new funds offering clients protection against currency debasement. “To have invented a new type of money via a system that is programmed into a computer and that has worked for around 10 years and is rapidly gaining popularity as both a type of money and a store hold of wealth is an amazing accomplishment,” Dalio wrote.

 

Index Summary

  • The major market indices finished down this week. The Dow Jones Industrial Average lost 3.27%. The S&P 500 Stock Index fell 2.96%, while the Nasdaq Composite fell 3.49%. The Russell 2000 small capitalization index lost 4.06% this week.
  • The Hang Seng Composite lost 4.27% this week; while Taiwan was down 5.50% and the KOSPI fell 5.24%.
  • The 10-year Treasury bond yield fell 1 basis point to 1.075%.

You can read the remainder of the article here https://www.usfunds.com/investor-library/investor-alert/power-to-the-players-reddit-robinhood-and-bitcoin/

January 29, 2021

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

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