The Breakdown - Have the Hedge Funds Infiltrated Reddit’s WallStreetBets?

Episode Date: February 2, 2021

Today on the Brief: Elon Musk talks bitcoin on Clubhouse India trying to ban crypto? DEXs have best month ever in January  Our main discussion: Has WallStreetBets been infiltrated by hedge funds?  Reddit community WallStreetBets became headline news last week when its short squeeze of GameStop (GME) nearly brought a famed hedge fund to its knees. According to Twitter personalities and the mainstream media, the community has now turned its focus to squeezing silver.  Except, one cursory look at the subreddit shows that isn’t the case. Instead, it is full of posts about how hedge funds and media are trying to promote the silver story to distract and divide the community.  In this episode, NLW tries to break down what’s happening and argues that now that WSB has become a market force, these sort of attempts to influence its conversation are going to become de rigeur.  -- Earn up to 12% APY on Bitcoin, Ethereum, USD, EUR, GBP, Stablecoins & more. Get started at nexo.io -- Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW   The Breakdown is produced and distributed by CoinDesk.com

If a new asset narrative quote-unquote invades WSB, who has more legitimacy? The 5 million newbies who joined over the weekend are the original million OGs. These are the types of battles that are going to be fought, which is all a reminder that this is a real, meaningful force in markets now. It is not dismissable and it is not ignorable. I don't know exactly what's happening with Silver, but I know we need to be paying attention to it. Welcome back to The Breakdown with me, NLW.

It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexo.io and produced and distributed by CoinDesk. What's going on, guys? It is Monday, February 1st, and today we are asking the question, have the hedge funds infiltrated Wall Street bets? First up, however, let's do the brief. First up on the brief today is Elon Musk's appearance on Clubhouse last night. For those of you who aren't familiar, Clubhouse is an audio-only social network. It's organized around room where people moderate discussions that anyone in the room can join if they're invited by the moderators.

It is the current Silicon Valley darling, and frankly, I had some skepticism at first. I had a little bit of personal disinterest because the early rooms that I saw were all Silicon Valley Insider Baseball tech-wankery. And I also wasn't sure how people would build followings. And I think it's really important with any new social network to have a clear path where people can build followings. Otherwise, there's less of an incentive to stay there when the network is early. Clubhouse, I will admit, however, has gotten more interesting. The audience has gotten a lot more diverse. It's up to about five million people. Every room is about, it seems, making money, hustling, investing. I've also gotten more convinced that there is a type of person it's really good for, extemporaneous speaking.

This type of person can build a following really fast because of the particular way in which Clubhouse shows all of the rooms that have the most people at the top. Anyway, last night, Elon Musk did his first conversation on Clubhouse, and for about an hour answered questions from the moderators that included Mark Andresen. The conversation was, as you might expect, all over the place. He talked a lot about colonizing Mars. He talked about memes. He talked about Neurrelink.

And, of course, he talked about crypto. Now, he did caveat his comments on crypto saying that he needed to be careful because he wasn't trying to shape the price in any way. But the two coins he spoke specifically about were Doge, which to him is indeed a meme, although he did say that the most ironic outcome would be if Dogecoin became the currency of Earth in the future. But then he talked more explicitly about Bitcoin. He said, I am a supporter of Bitcoin. I am late to the party but a supporter. I think Bitcoin is on the verge of getting broad acceptance by conventional finance people. It seems then, as we were discussing last week, that his addition of Bitcoin to his profile wasn't just a troll for all of us.

Next up on the brief today, a crypto ban in India? On Friday, news broke that the Indian Parliament will consider a bill to ban private cryptocurrencies, and given that the ruling party controls both houses of parliament, there is a strong chance some version of this bill gets passed. Basically, it would say FU to private cryptos, while also simultaneously, providing a framework for creating an official digital currency to be issued by the Reserve Bank of India. One note, the bill doesn't single out private cryptocurrencies. It doesn't use the name Bitcoin, for example. To understand this, though, I think we need a little bit of context. The Reserve Bank of India has been extremely anti-crypto. Effectively, it prohibited crypto for about two years from

between 2018 and 2020, and the way they did so was they made it impossible for banks to work with crypto companies. In early 2020, this was overturned by the Indian Supreme Court, and India's crypto scene has flourished since then. It's entirely possible to me that this is more about stable coins, fiat-denominated stable coins, than decentralized network coins like Bitcoin. Although at the same time, it's not clear that that's a distinction lawmakers understand. The reason I mention that is that I think that those fiat stable coins are more of a threat to a government-issued fiat stablecoin. I also think that before we get over the overly concerned, we need to recognize that there is a large and growing Indian crypto community

who will avail themselves of the democratic process in that country to help nudge this in a better direction. Still, it is worth paying attention to because it could perfectly feed what appears to be the most important or at least the most common big picture fud of this cycle, which is that governments will just try to ban Bitcoin and Crypto if it gets too big. Even in his recent I'm changing my mind type of piece on Bitcoin, Dahlio reiterated this concern. Finally on the brief today, decentralized exchange volume hit a new all-time high in January, and it was in fact double, more than double, the previous all-time high. Trading on Dex's hit about 56 billion in January, up 23.5 billion from December. Of that, 45% came from Uniswap, while Uniswap's rival sushi swap had about 22% of volume.

Let's be clear, this volume is being driven primarily right now by crypto traders in an extremely hot and an extremely volatile market. However, given that our biggest economic story of the last week is around the traditional financial establishment throwing their weight around to deny people access to markets, decentralized exchanges have taken on a different type of importance, which is perhaps a perfect segue to our main discussion. What's the latest in Wall Street bets, and more specifically, has it been infiltrated by the hedge funds and the traditional financial establishment? Let's actually start with a mini read from Mark Cuban.

So on Sunday, he published a blog post called The Store of Value Generation is kicking your ass and you don't even know it. The first part of the piece is a huge deep dive on digital collectibles, background about the evolution of the crypto space, but then he gets to this line. So what does this have to do with Wall Street bets and GME and the other stocks they are trading? From here, I'm going to read just a set of excerpts that I think are really important for our conversation. It's pretty obvious that the WSB traders are applying the same principles of the digital and crypto asset world to the stock market, and they are loving the fact that the old schoolers are hating it.

Wall Street and the agency that governs it, the SEC, have become Fat and Happy. Fat and Happy makes old school slow and resistant to change. very resistant, and obviously very unaware of the change that is happening around them, which leads to what they are missing and don't believe can or will happen. But first, here is what they do believe. They believe that no matter what the companies that small traders buy or the digital assets they buy will go down in value, considerably. They look at companies like GME, ABMC, BBBY, and understand what happens with a short squeeze and how that can force prices up. But as bad companies, the prices will come back down, because that is the way pricing

in the stock market has always worked. Put another way, the old schoolers think they are smarter. They are not. And now we get to connect the dots of how the store of value generation is kicking old school ass. This generation doesn't care what old school Wall Street thinks or says about valuations. They don't care about price earnings ratios or NPV of future cash flows or what the analysts say the earnings per share this quarter. Don't care at all. They have learned from their experiences watching Wall Street go up and down and making people who aren't them a ton of money, that it's a game designed to reward the people with the most money, that all these narratives are just sales pitches designed to sell stocks

and they want to change the game and kick their ass, which they should have every right to do. Sure, every single person knows they can make or lose money from their trades, whether it's GME, AMC, Bitcoin, or AVE. Sure, there are people who are in unfortunate circumstances and risk more money than they should, But there is zero difference between them getting or following advice from Reddit or someone on CNBC or Bloomberg. They also know that the more they work together, the less power Wall Street has.

They know that Fat and Happy Wall Street has become slow, stale, and set in their ways, which makes them an easier target than anyone would expect. They as a group can target any hedge fund, any stock, any time for any reason, and change the game. No different from a major Wall Street analyst making a major call can move a stock by getting their whale followers or client. to buy or sell. Now WSP and the people who follow it, the collective can do the same, but with much more power and impact. The store of value generation isn't looking to break laws. They're looking to break the system that has created challenge after challenge for them. Obviously, if you've listened to my shows on this topic, you know that I agree heartily,

especially with that last statement. But let's check in about how many other people seem to agree with that. Many investors want to be a part of the next bull run. Others seek to build their dream home, finally launch that startup or fund their education. Try Nexos instant crypto credit lines and borrow against any major cryptocurrency with no minimum or maximum withdrawal amounts, no fees whatsoever, no credit checks, and flexible repayment. Not to mention the APR starts at just 5.9%. Stay on top of your investment game with nexo.io.

And remember, it's your crypto, your credit, your choice. Get started at nexo.io. The growth in the Wall Street Betts community has been insane. At the beginning of this, it was just a couple million people. Today, it is up to 7.9 million members. Along with this growth, however, comes risk. Last week, Wall Street Betts took on the mantle of a movement, something that was bigger than any one stock.

And when power starts to shift in that way, the old power holders tend to be extremely, extremely adept at trying to co-opt it. And that's what I'm interested in talking about today. Specifically, over the last few days, there has been a huge narrative around silver, that silver is where Wall Street Betts is going next. This narrative, interestingly, was most pronounced on Twitter. Just a couple examples from our own crypto world. Tyler Winklevoss tweeted, The ramifications of a silver squeeze cannot be underestimated. If it's exposed that there are more paper claims on silver than actual silver, not only would the payoff be enormous, but gold would

be next. His brother Cameron reinforced this point, tweeting, if the silver market is proven to be fraudulent, you better believe gold market will be next. Huge implications, especially for countries that have de-dollarized and central banks with large gold holdings. Max Kaiser also talked about it, although to be fair to Max, this is not his first rodeo with silver. Let's listen to this clip from Max in 2010. Hi, this is Max Kaiser, host of the Kaiser Report. I want to talk to you about this global viral campaign, crass J.P. Morgan by silver. The fact

is that J.P. Morgan is a huge player in the derivatives market. They've got a balance sheet exposure of something like $1.5 trillion. A lot of that is tied to their silver shorts. That is to say, they have sold silver contracts that don't exist. They're engaged in

naked short selling. This is a form of counterfeiting. Huge hedge funds around the world are buying lots of silver, because they know that if they force J.P. Morgan to have to buy silver in the open market, they're going to make money. So what I'm saying is you can piggyback on these huge players. All you need to do is buy one silver coin, maybe two silver coins, demand physical delivery of that silver, thus forcing J.P. Morgan and these other financial

terrorists to have to cover their negative bets and put a company like J.P. Morgan basically forcing them into bankruptcy because there's no way they can cover their liabilities if we all buy one silver coin and demand physical delivery. Put J.P. Morgan a financial terrorist out of business. Buy silver. As you can tell, all of these folks

are talking about this silver squeeze because of some relevant context for something that they believe in. But still, I couldn't shake this feeling that this silver squeeze as the next thing Wall Street Betts was going after seemed like a really strange narrative. Joe Wisenthal tweeted seemingly from my own brain, Sorry, can someone explain in what sense buying silver is taking it to the boomers? Am I going crazy?

And so I think here you've got to look at who owns the most silver. When you look at ishares, that's Black Rock Silver Trust, which is theoretically the thing being targeted, the top owners are Morgan Stanley, Bank of America, USB, and Citadel. The same Citadel that we talked about last week in the context of Robin Hood. However, strangeness or not, difficulty in understanding how something that was good for Citadel and Morgan Stanley would also be good for Redditors and the type of thing that they would want to do, you've seen over the last couple days a ton of mainstream media pieces saying some version of Reddit turns its sites to silver. CNN Business runs the headline Silver Surges as Reddit Army targets precious metals.

Bloomberg's silver prices surge to eight-year high among Reddit-fueled frenzy. USJ, online traders propel silver, AMC shares gain. Anyway, still curious about this, I went and looked on the Wall Street Bet's front page. Given how much chatter there was on Twitter, I expected the whole thing to be all about silver, but guess what? It wasn't. Of about the 51st posts, only three were about silver, and they were, one, Citadel is the fifth largest owner of SLV. It's imperative we do not squeeze it. These are hedge fund bots spamming awards. The second was, why an SLV squeeze will 100% not work. And the third was,

trying to short squeeze silver is a bad idea. I tweeted out, on Twitter, everyone is saying Wall Street Betts is going after Silver next. On Wall Street Betts, there are only three posts on silver in about the top 50, and they're all warning everyone to stay away. Someone is orchestrating a serious disinformation campaign. That post went extremely viral.

It has been shared more than 2,500 times, liked more than 10,000, and the vast majority of the people sharing it are self-identified WSB people saying something to the effect of, this is a distraction to get us to lose focus on GME, AMC, etc. This is a manipulation by hedge funds, Citadel specifically. Or this is media using this as a tool to distract and divide us. As some have pointed out, there is clearly something happening with Silver. Stacey Herbert responded to that post and said, someone is buying huge amounts of retail physical. And then she pointed to a statement from Apex, which is one of the largest online bullion dealers, basically reinforcing that point. But still, I think a reasonable question,

which comes from Sam Callahan in the comments, said, is it, A, big players taking down the silver squeeze talk because they are scared by it? B, big players planted the silver squeeze to distract from the GME squeeze, or C, big players planted the silver squeeze to pump their own silver bags. To be honest, trying to make heads or tails of the silver thing is extremely difficult right now. And to be clear, I am not arguing at all about whether this is a good or bad investment. My point is that while it is extremely hard to be clear on where this silver talk is coming from, it is not coming from WSB itself. So what is happening? Here's my take. Wall Street Betts itself is now a battleground. Chimath tweeted out this weekend, Wall Street Betts is

now the largest hedge fund in the world, except it's completely decentralized and entirely democratic. Well, guess what? When you have the world's biggest hedge fund and it's completely decentralized, this is, of course, the result. People are going to do whatever they can to shape the discussion there because they know how powerful the amplification can be, not only in the community that exists and operates on Wall Street bets, but because there is so much media attention around it in the mainstream media as well. And frankly, and at the risk of piling on to an argument that has become frustrating in how much evidence there is for it, mainstream media, the financial media, particularly seems too lazy, more or less, to do any real digging on this. Again, if you're a

member of this community, it's hard not to feel like they're just trying to divide you, especially when headlines are things like Citadel Silverholding exposes Rift in Wall Street Betts Army. Now, digging into this, Ben Hunt and Epsilon theory went even deeper. He tweeted yesterday, We've started tracking the narrative structure of Wall Street bets. Over an eight-hour period yesterday, we tracked 30,000 posts. Of those posts, 97% were removed by mods or filters. It's all bots all the time. Once again, you're being played. This isn't about bots or any individual mode of spoof. It's about how all of social media has been successfully gameed by investment pros, is being successfully gamed by investment pros, and will be successfully

gamed by investment pros. Meet the new boss, same as the old boss. And by investment pros, I don't mean hedge funds, although yes, that too. I mean Elon Musk. I mean Mark Benioff. I mean Chimoth. I mean every billionaire who goes on Twitter or CNBC to tell you how to think about their latest promote. My point is that if you don't think Millennium has a dozen teams trying to influence USB right now, you're not paying attention. This to me feels extremely accurate. The size of this community has four or five X'd in just a couple days. Meanwhile, the financial world has seen how powerful the amplification in this army and this force can be. I'm not interested in any one conspiracy theory or another, but of course, when the stakes are this high, it would be just

economically rational for firms to try to figure out how to shape the narrative in this new medium. What's more, at some point, you're going to have a debate within communities like Wall Street bets about authenticity and legitimacy. If a new asset narrative quote-unquote invades WSB, who has more legitimacy? The 5 million newbies who joined over the weekend or the original million OGs. These are the types of battles that are going to be fought, which is all. all a reminder that this is a real meaningful force in markets now. It is not dismissable and it is not ignorable. I don't know exactly what's happening with silver, but I know we need to be paying attention to it. Until tomorrow, guys, be safe and take care of each other. Peace.