theSkimm on Investing Manias

Published on: Nov 11, 2021fb-roundtwitter-roundemail-round
NFTs at an art gallery Illustration: Daniel Fishel
The Story 

People have been investing outside the box lately.

Are you talking about GameStop?

That's one (big) example. But there are other investment manias getting attention, too. Backing up: an investing mania is when investors go wild and drive up the price on something. Sometimes WAY higher than it might actually be worth. See also: digital toilet paper art with the highest bid at more than $2,800 and Dogecoin’s price more than doubling in one day.

Related: Let's Talk About...Why Everyone's Crazy for Crypto

Okay, but why?

Crypto exchange Coinbase and investing apps like Robinhood have made trading easier. (PS: a 45-page SEC report found that Robinhood, which is often credited – or blamed – for helping make so-called “meme stocks” happen, did everything by the book.) The pandemic's also given some investors enough time and boredom to get to know and invest in less familiar assets like Bitcoin and NFTs.

NF-what?

Let's Skimm it. Plus a few other popular investments:

  • NFT: Stands for "non-fungible token." That’s a unique digital asset that can’t be replaced. It often takes the form of virtual art, but can be anything from a New York Times column to a TikTok to a digital home. When you purchase an NFT, you get a token secured by blockchain technology that says it's yours to keep. Or resell for a profit. NFT sales hit a record $2.5 billion in the first half of 2021 – largely thanks to celebs creating their own to sell. (Hi, Eminem, Paris Hilton, Snoop Dogg and Martha Stewart.) And platforms like Coinbase are looking to make NFT trading more accessible to the average person.

  • Cryptocurrency: Encrypted digital money that can be used to make purchases on some sites. Unlike real-world currencies, they're not backed by any gov or central authority. Instead, like NFTs, many are blockchain-based. A few you may know: Ethereum, Litecoin, Dogecoin, and of course Bitcoin. And a steady stream of new kids on the block(chain). Like Shiba Inu coin, aka the "dogecoin killer." But warning: not all coins are for real. Squid token – based on Netflix's "Squid Game" – quickly rose to $2,856 per coin in early November before crashing to $0 after the scammers walked away with a few million dollars.

  • SPAC: Short for "special purpose acquisition company." It's basically a shell company that raises money by going public, then buys a private company...that they'll tell you about later. Meaning investors like you can purchase shares of a SPAC like any other company stock, but without knowing for sure what the business will be. Hello, risk. That's why they're also called “blank-check companies.” But psst...the tea on rumored deals tends to spill ahead of formal announcements and encourage investors to buy. Nikola, DraftKings, and Virgin Galactic each got their public starts via SPACs. And WeWork is working on its own deal.

  • Meme Stock: A stock made hot (or not) thanks to amateur investors coordinating their buys using social media and online forums like Reddit. Think: AMC Entertainment, BlackBerry, and yep, GameStop, which was below $5 per share in 2020 and was driven as high as $483 a share over the past year (with a lot of ups and downs in between).

So which one(s) should I invest in?

Before you fall for bandwagon bias and into any mania, recognize that all these investments have one thing in common: lots of risk.

One reason is that they're relatively new, so they have no long-term track record to help you gauge their performance potential. Also, their values are often tied to investor sentiment – that’s how they feel about an asset and its price at a particular moment in time – rather than fundamentals, like what the asset is really worth. 

Hmm, okay. So which one(s) should I invest in?

Remember investing in SPACs and meme stocks is technically just like investing in regular stocks – but with a high risk profile. So if you want to invest, think about what would complement your existing stock portfolio.

NFTs and crypto are something completely different. If you do decide to get in on the action, limit it to a small portion of your portfolio. And only invest with money you can afford to lose. That may not be as exciting as owning Jack Dorsey’s first tweet, but a fully-funded future can be your own masterpiece.

theSkimm

Before you dive wallet-first into one of the latest investing crazes, be sure you understand what they are and the risks that come with them. Then you can decide whether they make sense for you.

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Skimm'd by: Ivana Pino, Sagine Corrielus, Casey Bond, Stacy Rapacon, and Elyse Steinhaus