The retail investor-fueled frenzy around meme stocks and cryptocurrencies has been framed in the media around colorful characters. Barstool Sports founder Dave Portnoy takes on Robinhood CEO Vlad Tenev in a David-and-Goliath-style saga; billionaire Elon Musk pumps the price of Dogecoin with memes over Twitter. While these storylines and narratives are compelling, they miss the underlying driver of this new phenomenon: the desire of retail investors to participate in markets on the same terms as Wall Street.
Retail investors currently account for an estimated 25 percent of the stock market. They have the capital and the appetite for risk but are not given access to deals. Rather than sit on their hands, they seek out opportunities available to them, whether it’s a short squeeze or momentum trading with options. Rallies such as GME and AMC are a loud message that we have a new generation of investors ready to change the capital market.
Although the number of initial public offerings (IPOs) has had a gradual decrease over the last three decades, the size of individual deals has increased. This means fewer companies are offering their growth potential to the public. Who is capturing that growth? Investors with access to private deals, expertise or complexity to handle the deals. However you spin it, one thing remains constant: Retail investors don’t get a part of the pre-IPO growth. While Uber went public at a $75 billion market cap, very little of that value was captured by retail investors or the drivers who helped create that valuation. Coinbase, likewise, went public at a $50 billion market cap but did not allow the retail investors who built its platform to participate until after the company directly listed.
The rise of decentralized finance (DeFi) enables early investors and communities to help new ventures succeed, while giving them equity on the ground floor. Although cryptocurrencies and DeFi protocols are the early products in this space, DeFi is harnessing the power of retail investors and creating a positive feedback loop leading to inclusive capitalism.
The stock market has been framed by regulatory policy and media narratives as a complex black box, such that regular and unsophisticated investor shouldn’t touch it. Despite many different regulations, from investor protection (Dodd-Frank Act of 2010), corporate structures (Securities Act of 1933), accounting (Sarbanes-Oxley Act of 2002) to consumer credit (Truth in Lending Act of 1968), regulations sometimes fail to protect before an issue has already risen. During the 2008 Financial Crisis, retail investors lost their homes, while Wall Street received billion-dollar bailouts that went to corporate executives.
The new retail investors bet against non-transparent practices (such as naked shorts) and nudge the market toward a more transparent ecosystem. However, because the traditional financial system starts from inherent secrecy and private deals, neither retail investors nor the regulators may be able to discover these practices as fast as an efficient market requires. Transparency is an inherent part of DeFi, and any participant or investor trusts the open code and practices. All the transactional data is publicly available to everyone, leading to a fully transparent system to start with.
Fair access to participate in markets and having access to the same information that other players have access to is an essential part of a level financial system. Consumer DeFi, a decentralized financial system serving consumers, is inherently transparent and provides early access for the investor and community to benefit from the growth. The retail frenzy will evolve to consumer centric financial markets and more inclusive capitalism through this decade.
Hossein Azari is the CEO of cmorq, a consumer DeFi platform specializing in blockchain analysis to create better banking for everyday people. He was previously a Senior Research Scientist at Google and cofounded Clarity Money (which was acquired by Goldman Sachs).
