Hopefully, this latest stock bubble and what is also described as a "decentralized Ponzi" will be gently deflated without severe losses by the retail crowd and individual investors. The "too big to fail" will not fail - except in rare cases where one or two are sacrificed for the greater good - because they will be bailed out.
Obviously, there must have been strenuous efforts last week and into the weekend to resolve potential brokerage issues that can cause great damage to the markets and financial system but it appears as if such will not occur this time round.
Expect sharp bounces, sell the rallies, and more bounces until this is resolved.
Decentralized Ponzi Summary
- The operation of the "bull pool" at wallstreetbets resembles a Ponzi scheme.
- There are five things that make it different.
- Pushing stock prices too high will only lead to dilution from the corporations and losses to the buyers who came in late, if not the early ones as well.
The operation of the "bull pool" at wallstreetbets resembles a Ponzi scheme. There are five things that make it different:
- It is decentralized.
- Because it is decentralized, there is no single party that controls it and rakes off some of the money for himself, at least not directly.
- The assets can be freely sold in a somewhat liquid but chaotic market. Most Ponzi schemes have time barriers for redemption.
- They caught a situation where shorting was so rampant, that triggering a squeeze was easy. Situations where the shorts are so crowded are rare.
- GameStop (NYSE:GME) and other companies whose stock prices get manipulated above their intrinsic value can take the opportunity to sell more shares, as can less than 10% holders of the holders of the stock, and even the greater than 10% holders once six months have passed since their last purchase.
You have to give wallstreetbets credit for one thing, and only one thing: wiping out the shorts. It was an incredibly crowded short, and they identified an easy squeeze. But now it is harder to short, margin requirements have been tightened for both longs and shorts, given the market volatility, and even more so for options. That not only applies to individuals but also to brokerages, because with the volatility, there is a greater probability of settlement failure, and broker failure. Robinhood faced possible failure and raised capital. What shorts remain are better financed than previously. When volatility goes up, so must the capital of intermediaries, including brokerages.
Ponzi schemes typically need ever-increasing flows of money to satisfy the cash need from the money being raked off. But there is no sponsor here, so what plays the role of the rake? I can think of three rakes for the money:
https://seekingalpha...ntralized-ponzi
