Today's guest column comes from Nathaniel Popper, author of "The Trolls of Wall Street: How the Outcasts and Insurgents Are Hacking the Markets" (from which this article is excerpted) and "Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money." He has worked as a reporter for The New York Times, The Los Angeles Times and The Forward.
The crypto boom in the final months of 2017 woke up millions of people to the idea that you could get rich from your phone. In December alone, three million people downloaded the app for Coinbase, the main American crypto exchange. Coinbase had been much smaller and less popular than Robinhood, but in December, it got about six times more downloads.
A month later, as the newly assembled crowds watched the value of bitcoin (BTC) and many other digital tokens plunge in January of 2018, those who had not lost their shirts completely went looking for an alternative place to direct their freshly awakened hunger for speculative excitement. TD Ameritrade reported that trading activity in January was up 48% from a year earlier, with the fastest growth coming from Millennial customers. It didn’t hurt that stocks had gone up alongside bitcoin. The benchmark S&P 500 index finished 2017 up 22%, its ninth positive year in a row.
Robinhood had missed the bitcoin boom, only announcing an expansion into crypto trading at the end of the bubble. But the company managed to have perfect timing for what came next. In December 2017, the start-up had announced it was about to begin allowing customers to trade options contracts. As it had with stocks, Robinhood eliminated the commissions that other brokers charged for options trading. The announcement had been largely ignored at the time because of the focus on crypto. But in January, attention quickly turned to the new capabilities opened up by Robinhood.
“Lost 5k in crypto, ready to lose another 5k trading options — where do I start to begin my path to autism?” one characteristic post asked in early 2018.
This was something of a replay of early 2015 when WallStreetBets had suddenly whirred to life in the wake of Robinhood’s initial launch. Now, after struggling in the shadow of crypto, WallStreetBets was again overflowing with newcomers eager to try out Robinhood’s latest offering.
“I’ve never seen an influx of noobs like there is right now,” one Reddit old-timer wrote. “It’s obviously because of RH.”
But this new burst of activity on WallStreetBets was viewed with much more suspicion than the previous one. Jaime had started the subreddit as a result of his interest in the alluring complexity of options. But after going through numerous bouts of losing, he realized, with the help of outsquare, that the odds were stacked against small-time investors in the options markets.
“If I have but a single regret of starting this wonderful community it is the incessant obsession and poor understanding of options,” Jaime wrote in a cautionary post.
Options, he wrote, are “incredibly stupid ways of throwing perfectly good money down the dark bowels of Wall Street.”
Trading options doesn’t necessarily look dangerous on its face. In the most basic terms, an option is just a way to bet on the future value of a stock without having to buy that stock. But there are lots of devilish risks buried in the intricate structure of options. The most obvious danger with options is that, unlike stocks, they expire on a specific date. If the stock price did not do what you had bet it would do by that date, you lose all the money you put in.
Due to the binary, win-or-lose nature of options, they are often referred to as the lottery tickets of the financial markets. If you own a stock and the price falls, it generally still has some value and you can wait for it to recover. But with an option, if your bet goes south, you are left with nothing — and that is indeed how it usually ends. The inherent risk of options is multiplied by the fact that most opions are pegged to the price of 100 shares of the underlying stock. This means they can go up much faster than the actual stock — an attractive feature for the risk-seeker — but they can go down just as fast.
Jordan had disagreed with Jaime on other things, but when it came to options, they found common ground. Like Jaime, Jordan warned users to stay away from options unless they had a very clear idea of what they were doing.
“options will make your dick fly off” was how Jordan put it. “it’s scientifically proven.”
But these voices of caution and the early posts about losses only seemed to rev up the appetite for risk on the subreddit. One user mentioned losing 93% of his portfolio. Right below that, another user quickly one-upped him with perverse pride: “To the guy who posted his 93% loss. This is a real 90% loss.” The post showed a picture of the Robinhood home screen with a line descending sharply from $22,000 to $2,000 in less than a month.
In 2018, WallStreetBets once again began to attract media coverage, and the articles took note of both the growth of the subreddit — which was up to 300,000 members by mid-2018—and the bizarre penchant members seemed to have for losing money. The first magazine profile of the website, in Money, was titled: “Meet the Bros Behind /r/WallStreetBets, Who Lose Hundreds of Thousands of Dollars in a Day — and Brag About It.”
The WallStreetBets regular featured at the top of the story was a 24-year-old programmer who had found options trading on Robinhood after making a small killing on crypto. He then managed to lose $180,000 in a matter of days on a single bet on Facebook stock.
Read the full excerpt online...
