Dogecoin’s rise to over $1 billion in daily trading volume, much like the dramatic 30 percent spike in Trump Media & Technology Group’s shares following the assassination attempt on now-President Donald Trump, exemplifies the volatile nature of memecoins. These cryptocurrencies’ wild price fluctuations are driven primarily by social media hype and online community engagement rather than traditional financial metrics. While news outlets have reported that several asset managers are looking to launch ETFs for memecoins, our new article on the regulation of speculative instruments argues that the price volatility of memecoins underscores the profound impact they, alongside social media and speculative trading, can have on financial markets. This often blurs the distinction between genuine market activity and coordinated manipulation.

Memes have transcended their origins as internet phenomena to become tools that can dictate market movements. Social media influencers wield substantial power, transforming stocks into highly volatile assets that attract both retail investors and speculators. The convergence of meme stocks, Special Purpose Acquisition Companies (SPACs), and cryptocurrency speculation has injected volatility and uncertainty into financial markets, presenting significant challenges to market integrity and regulatory frameworks that require a reinvigorated approach to regulation.

The Rise of Meme Stocks

Meme stocks, colloquially known as “stonks,” gained prominence during the 2021 COVID-19 lockdowns. Factors such as increased retail investor participation, fueled by frustration, boredom, and government-stimulus funds, led to more market manipulation and a decline in financial market integrity. These stocks are highly volatile and attract many retail investors, who often coordinate to drive prices higher through social media rather than financial analysis.

The speculative allure of meme stocks lies in their capacity to trigger the “madness of crowds.” Investors are excited by rapid price movements and the potential for quick profits, frequently disregarding the underlying financial health of the companies. This herd behavior is amplified by influencers on platforms like Reddit’s r/WallStreetBets and X (formerly Twitter).

Meme Stocks, SPACs, and Cryptocurrencies: A Triple Threat

Meme stocks resemble cryptocurrencies in their speculative nature and the strong sense of community among people who invest in them. SPACs, initially established to merge with or acquire other companies, have also become targets of intense speculative trading. Companies such as Virgin Galactic Holdings (SPCE) and Nikola Corporation (NKLA) have experienced extreme overvaluations followed by significant downturns, driven largely by social media hype rather than fundamental performance.

The intersection of meme stocks, SPACs, and cryptocurrency-like trading introduces a “triple threat” to market integrity. These financial instruments amplify each other’s risks, destabilize markets, and erode trust in regulation.

The Role of Social Media and Addictive Technologies

Social media play a pivotal role in the manipulation of meme stocks. Influencers with large followings can sway investor sentiment, driving coordinated buying or selling that leads to extreme price volatility. The gamification features of trading apps further exacerbate this issue by making trading more engaging and addictive, encouraging impulsive decisions based on fleeting trends rather than sound investment principles.

In addition, addictive technologies and real-time sentiment analysis can track and influence market behavior, making it easier for manipulators to orchestrate campaigns, rapidly disseminate information, and cause speculative trading to thrive

Regulatory Challenges and the Need for Innovation

These developments present significant challenges for regulators. Recent guidance from the New York State Department of Financial Services (NYDFS) on sentiment-based virtual currencies—commonly known as memecoins—underscores the need to address these issues and  highlights several key concerns. Volatility is a primary concern as memecoins exhibit significant value swings driven by social media hype. This volatility makes them susceptible to pump-and-dump schemes, where prices are artificially inflated before being sold, leaving late investors with substantial losses. Additionally, memecoins present bank-run risks due to their limited liquidity, which could lead to sudden market crashes if large numbers of investors attempt to sell simultaneously.

Cybersecurity threats are another major concern, as memecoins are more vulnerable to hacks and scams than more established cryptocurrencies. The decentralized and often anonymous nature of these assets makes them attractive targets for malicious actors. Furthermore, regulating sentiment-driven assets poses significant challenges. The rapid pace at which these assets can gain popularity makes compliance and oversight difficult, as regulators must continuously adapt to new trends and technologies.

Consumer protection is also a critical issue, as there is a widespread lack of understanding about the risks involved in investing in memecoins. Many investors are drawn by the promise of quick profits without fully comprehending the underlying risks and market dynamics. This lack of knowledge can lead to uninformed investment decisions, increasing the potential for financial losses and market instability. Lastly, the potential for market manipulation is heightened with sentiment-based virtual currencies, as their value can be easily influenced by coordinated online campaigns and misleading information.

Protecting Market Integrity

The fusion of meme stocks, SPACs, and cryptocurrency speculation represents a significant shift in financial markets, driven by social media and advanced trading technologies. To safeguard market stability and protect investors, regulations must evolve to address these new challenges. Our article argues that regulators must strengthen disclosure requirements, adopt advanced monitoring technologies, and foster investor education to better navigate the complexities of modern financial markets. It also urges investors, the private companies, and regulators to use caution and thorough risk assessment for entities dealing with speculative devices, emphasizing the need for robust regulations to protect market integrity and investor interests.

Issued on January 15, 2025, the NYDFS guidance on sentiment-based virtual currencies also serves as a timely reminder of the need for comprehensive regulation. As financial markets evolve, a proactive and adaptive approach will be essential in mitigating risks and ensuring long-term market integrity.

This post comes to us from John W. Bagby, professor emeritus at Pennsylvania State University, and Nizan G. Packin, professor of law at the Zicklin School of Business of Baruch College, CUNY and the University of Haifa, Faculty of Law. It is based on their recent paper, “Meme-Manipulation: Towards Reinvigorating the Regulation of Speculative Devices,” available here.