The Digital Pump and Dump
Feb 12, 2021
Dylan’s Weekly Notes 2/12/21:
A group of people conspiring to promote a specific stock with the explicit intention of running up the price in order to sell it for a profit is illegal, and is a practice as old as time. In Wall St. parlance, they’re called Boiler Rooms.
Stock prices are, as we all know, intended to reflect the future profit and revenue potential of a business. In general, stock prices adjust as those future profit and revenue expectations shift over time.
In the short term; however, stocks are vulnerable to massive waves of sentiment and even hysteria much like what we are seeing in everything from crypto to Tilray to Chinese electric vehicles.
So where are we to draw the line between enthusiasm for a company we think has a great idea, and the promotion of stocks whose only merit is in the ability to make the price go higher with enthusiasm?
From a regulatory side you need to err on the side of well placed enthusiasm. From a trading standpoint you have to assume that enthusiasm is rampant and seize the opportunity.
While fraught with risk, huge amounts of market volatility and digital chatter distorting these prices can be unrelenting.
But like anything else driven by excess, that which goes up, must come down, so the only question is timing and size - since the outcome is certain. The prices will come down, the volatility will come in. We just have to stay small enough and extend duration to be there when it happens.
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