- Meme stocks came onto the stage in 2021 as retail traders drove massive rallies in some names.
- The trend may be fading though, as retail traders rotate into cryptocurrencies.
- Crypto regulation will legitimize the asset class and lead to further adoption among retail investors.
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One year since GameStop started it all, the meme stock craze is fading.
Last January, millions of retail traders banded together to drive eye-popping rallies in highly shorted, nostalgic companies, like GameStop, AMC Theaters, and BlackBerry. Day traders minted a new asset class dubbed the "meme stock" and regularly added new companies to the basket over the course of the year. At one point a tiny Danish biotech company surged more than 1,300% in a day on interest from individual investors looking for the next short squeeze.
But observers say those wild spikes are likely to subside as retail traders look to new horizons to replicate last year's massive gains.
"Meme stock rallies are going to taper off," said Dan Raju, the cofounder and chief executive officer of Tradier. "I expect in 2022 the active traders jump into crypto."
Tradier is a financial technology and software firm that powers much of the active retail trading in the market. Last year, the brokerage-as-a-service provider processed about $46 billion in assets for 2 million traders worldwide.
The factors that contributed to meme-stock rallies, like people working from home and volatile pandemic markets, are subsiding, Raju said. To top it off, retail traders have "graduated" from simple equities trading and are moving into more complicated assets, like cryptocurrencies.
A report from Apex Fintech Solution published on Friday shows meme stocks began losing their lift at the end of 2021, with many popular names slipping in the rankings of top stock holdings. Meanwhile, metaverse stocks grabbed the attention of the youngest investors, with companies like Facebook parent Meta, metaverse-platform Roblox, and Nike, moving up in the rankings, Apex said. Though it is still loosely defined, the metaverse is a virtual world where people interact as avatars and can game, interact, and shop using cryptocurrencies.
Raju said volumes in cryptocurrency trading still remain relatively low among retail investors, with most active traders doing fewer than three trades per month.
But that's about to change.
"2022 is going to be the year of regulation," Raju said. "Regulation is good for crypto because it legitimizes the asset class. A lot of active traders have not jumped into crypto, so as regulation comes in, active traders will engage."
Many prominent investors have shied away from cryptocurrencies as they await more regulatory clarity from US agencies. Even popular trading app Robinhood has avoided calls to add more cryptocurrencies to its platform, citing regulatory uncertainty.
So far, legislators and regulators, like the US Securities and Exchange Commission and the Federal Reserve, have been hesitant to act. One exception in congress has been Cynthia Lummis, a bitcoin evangelist and a Republican senator from Wyoming who is said to be planning a bill that would be one of the first attempts to create a legal framework for crypto. Regulators, for their part, have begun exploring their own rules for the space, mostly focused on investor protections.
"Regulation is going to drive legitimacy," Raju said, and for retail traders, it's going to "funnel into creating crypto volume."