Unless you’ve been living under a rock you must have probably heard of the Reddit Effect. What began as an innocent movement to save everyone’s favourite video game selling retail company has now transformed into a full-fledged movement in which regular day traders take on large multi billion dollar hedge funds who once ruled Wall Street.
Today tens of thousands of day traders are uniting on a Reddit forum called r/wallstreetbets and together deciding where to invest, which company to save, and how to stick it to the 1% who have made billions at the cost of the rest of the population.
But what is the Reddit Effect? How did it begin? And how has it impacted cannabis stocks? For weed lovers who do not have a finance background, these are relevant and confusing questions. But worry not, for we’ll be answering all of these and more in this blog.
Let’s light up and take a look!
What is the Reddit Effect?
Before we answer that question, you might need a little bit of history on Reddit itself. Perhaps the biggest social media and information platform present today, Reddit rightly calls itself the front page of the internet.
Open source and free for all, the platform is loved by everyone and has everything on it. From cute pictures of pets, to the most vibrant and active meme page, to technical forums dedicated to teaching skills and discussing developments in various fields. In fact, according to statista, on average more than 1.5 billion people visit the site everyday!
Naturally, such sites have a lot of influence. Over the years, users of Reddit, called Redditors, have caused plenty of havoc on the world wide web.
One of the most famous ones is the Reddit Hug of Death, in which a site being advertised on Reddit would be suddenly visited by millions of users at once, causing it to crash and become unavailable.
Only recently, Reddit has once again displayed its power by rocking not just the internet, but the stock market as well.
Hundreds of thousands of traders united and pushed up the stock price of Gamestop by increasing its demand, and in turn causing hedge funds and short sellers to lose out on billions of dollars.
How did it all begin?
According to some experts, such a phenomenon was long overdue. Its roots can be traced back to the financial crisis of 2008, when excessive risk taking by American banks and insurance companies created a bubble in the real estate markets. When the bubble finally burst, it caused millions of dollars worth of losses to everyone, from banks and insurance companies, to retail stores and especially to the average US citizen.
While the US government did spend billions of dollars to bail out large scale banks like Citibank Group, the Bank of America group, and JPMorgan Chase & Co, it totally ignored retail companies like Blockbuster and Gamestop, who had also suffered millions in losses. And then streaming services like Netflix and online gaming platforms caused further losses.
Due to these reasons, Gamestop was becoming the victim of a short squeeze.
What this means is that investors, mostly hedge funds, predicted that the stock value of Gamestop would fall even further. So in order to make a profit, they borrowed and sold the stock when its value was high, hoping that it’ll go down even further. When the price does go down, they use the proceeds of the sale to buy and return the stock, at a much lower price than what they sold it at.
Naturally, if the stock price does not go down, then these investors are forced to buy shares in a desperate bid to cover their losses.
We all know what happened next.
Tens of thousands of day traders on r/wallstreetbets united, and started buying up stocks of Gamestop, increasing the demand and forcing its value to go up by around 8000%.
Now Hedge Funds like Melvin Capital, who were betting that the stock price will go down were also forced to buy up Gamestops Stocks, forcing the prices to rise even more.
And this was not only Gamestop. As the movement started gaining more and more attention, Redditors moved on and started investing in other retail companies like AMC Theatres, Bed Bath & Beyond, Blockbusters, and even Tootsie Roll industries.
The latest development in this fiasco is on cannabis stocks.
How has the Reddit effect impacted cannabis stocks?
On Tuesday 9th February, a user who claimed to make over 500,000 USD in earnings from the famous cannabis stocks Tilray and Aphrra boosted told the forum’s 8.8 million members that they still had a lot more room to rise.
His post quickly started trending and today has around 13000 upvotes and 1200 comments.
Tilray has been in the news quite a lot lately. The Canada based, US listed company has been riding a wave of good news. It has made agreements to export its products to Europe, and is set to merge with Aphria to create the largest cannabis company. No wonder it has drawn attention from both hedge funds and private investors on r/wallstreetbets.
Since December 2020, when the merger announcement was first made, Tilray’s share price has jumped around 400%, while Aphria has grown 243%. Other companies are also riding this wave: Canopy Growth’s shares have doubled, and so has ETFMG Alternative Harvest, a fund tracking cannabis stocks all over the world.
Since Wednesday 10th February, Reddit Day traders have started showing a lot of interest in cannabis stocks. Both Tilray and Aphria have seen sudden spikes in demand, and their share prices increased 21% and 10% respectively. However, just like Gamestop, this interest was short lived.
On the other hand, short interest in Cannabis stocks is also high. According to Reuters, approximately 37% of Tilray’s free float (shares which are being actively traded in the market) is currently loaned out to hedge funds, up from 27.3% in January.
Hedge funds are also quite familiar with cannabis companies. For example, in 2018, Tilray’s price skyrocketed from $20 to $300 in the three months following legalization, and forced short sellers to hastily cover their positions by buying stocks (which were also not quite readily available for purchase).
Nonetheless, according to Yahoo Finance, right now, there is an approximately 51% short interest in Cannabis stocks by hedge funds and institutional investors.
The only question remains is this, will the Reddit Effect make Tilray and Aphria the new Gamestop?
All we can do is wait and see.