Was ‘Big Short’ Investor Michael Burry Right about Crypto and Meme Stocks?

crypto and meme

A retrospective look on Michael Burry’s predictions about cryptocurrency and meme stocks.

“Fads today (#BTC, #EV, SAAS #memestocks) are like housing in 2007 and fiber/.com/comm/routers in 1999,” said investor and hedge fund manager Michael Burry in a now deleted tweet. His tweet was a response to the surge in Bitcoin prices and rising interest in meme stock earlier this year.

Burry received notoriety for his billion-dollar bet on the crash of the housing market in the mid-2000s. His accurate prediction was then documented both as a book and a film by the name ‘The Big Short.’

Here is a look at what Burry thinks about Bitcoin and meme stocks and how his predictions have aged over time.

Bitcoin and the “crypto bubble”

Burry calls Bitcoin a bubble. According to him, while the attention received by Bitcoin is not unwarranted, it probably would not last long. He even compared his current warning to the ones he had during the housing bubble.

As of writing this article, Bitcoin (BTC) stands at US$46,315. Its rise has paved the way for many other cryptocurrencies. Some of these include Ethereum’s ether (ETH), Safemoon’s safemoon protocol and Cardaon’s Ada.

Most cryptocurrencies have a correlation to Bitcoin. Correlation within stock market trading refers to two assets moving up and down in value together. The presence of a strong correlation within the crypto market was visible in the crash of 2018.

In 2018, Bitcoin’s value decreased at an unprecedented level. This was followed by a similar fall in the prices of other cryptocurrencies. The vast majority of cryptocurrencies experienced an even bigger fall than Bitcoin itself.

The supply of Bitcoin is capped at 21 million of which 18.7 million are currently in circulation. This limited supply is an indicator of a deflationary currency. This means that as more and more Bitcoin keeps on getting mined, the value of each individual Bitcoin will rise over time.

This rise in price encourages investors to hoard the cryptocurrency. With the currency not frequently changing hands, the actions of every investor can make drastic price differences. These, along with news headlines and speculation, are the reasons why critics of the cryptocurrency consider its growth a ‘bubble.’

The ‘Meme Stock’ buzz

Burry has called #memestock a trend. The term became a buzzword due to the actions of the subreddit r/wallstreetbets. The users of this subreddit led to a quantum leap in the stock prices of the US-based video game retailer GameStop.

In December 2020, the company’s stock price was as low as US$18.84. In January 2021, the stock price rose by 1700%. Other stocks that the subreddit promoted include cinema chain AMC Entertainment, the smartphone company BlackBerry and telecom firm Nokia.

Meme stock is a stock that sees a hike in value due to social media virality. Ironically, in spite of Burry’s warnings against meme stock, he might have been one of the reasons behind this hike. Burry invested in GameStop in 2019.

In August 2019, Burry wrote to GameStop’s directors arguing that the low stock price and interest rate suggested dwindling faith in management. This declining faith was visible in the fact that GameStop’s stock was trading at only US$4 a share.  In spite of his critique of the company’s management, Burry’s hedge fund, Scion Capital, held its stock of GameStop, and by September 2020 its 1.7 million shares in GameStop were worth US$17 million.

With Burry’s firm holding the stock and a stream of YouTube videos by investor Keith Gill (known as Roaring Kitty on YouTube), redditors might have been instigated to invest in the company.  The company’s shares were trading at low prices which Burry believes,” was a uniquely perfect setup,” and that “there won’t be another like it.”

What lies ahead

Burry’s predictions may have a grain of truth to them. Prices of both Bitcoin and GameStop have seen volatility. However ‘the mother of all crashes’ that he foreshadows is yet to come to fruition. Ever since his tweet, Bitcoin has been garnering more and more interest with El Salvador adopting it as legal tender.

Burry’s claim that Bitcoin is a ‘bubble’ might not be true at all. Analysts studying Bitcoin patterns suggest that the cryptocurrency reaches an all-time high every four years after which it experiences a fall. This fall never takes Bitcoin’s price below the highest value set in the previous four-year rise.

GameStop, which, as per Burry’s predictions, was supposed to be another ‘fad’, has still been maintaining a relatively high value. As of June 2021, the company’s stock is still up more than 1000%. While there may be a fall as attention dies down, the company appears to be fairing well at present.

Image courtesy of Unsplash

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