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The Transformation of Financial Markets: Small Traders and DeFi

The Transformation of Financial Markets: Small Traders and DeFi

Last updated: March 04, 2021 | March 02, 2021 | Luke Evans
finance

Table of Contents

  • GameStop and the Power of Mass Trader Action
  • Analyzing the Surge
  • Transformation through Decentralized Finance (DeFi)
  • Conclusion

Financial markets have historically belonged to the connected and the powerful. This position, even as a mere assumption, has influenced society’s perception of markets.

Well, that was until the rise of digitization and faster access to trades. Recent phenomena suggest that hedge funds and institutional investors may not enjoy the perks of finance alone for long. In cryptocurrency circles, the rise of Decentralized Finance is also providing financial equality.

GameStop and the Power of Mass Trader Action

Stock markets occasionally have unusual trends. The Gamestop rally last month was one of the most fascinating events in stock market history.

This rally has gone quiet, for now. Hedge funds had bet significantly on video game retailer, Gamestop, losing value. They padded their portfolios with short positions to profit from a price slump.

Redditors became aware of these short positions. In a unique display of small trader power, they banded together to boost Gamestop stock. This rally saw the stock explode 1,500% from less than $20 to over $400. Hedge funds were caught flat-footed. They were in line to lose billions from previously secure positions.

In effect, the retail traders created a bubble. Analysts took the time to understand the scale and speed of this event. The stock has since lost most of that value. However, the significance of this event may be around for posterity.

Analyzing the Surge

Some of the factors that contributed to this rally are:

  • The widespread access to smartphones on which people can download investing apps.
  • Availability of cheap trading platforms like Robinhood.
  • Free time during the Pandemic allowed people to learn and participate in trading.
  • The growth of alternative investment forums like WallStreetBets on Reddit.

Populism may have also played a role in the Gamestop surge. The idea of sticking it up to Wall Street titans caught fire. Deriding the greed of Wall Street firms is a political staple. Some people participated in this rally simply as a chance to turn the tables.

Similarly, there are thousands who genuinely decided to learn about trading. A glimpse at the Reddit forums shows convincing and analytical approaches to trading. Equity research is no longer the preserve of corporate firms with Ivy-league graduates.

Therefore, anyone who thinks that Gamestop is an isolated event could be mistaken. The Reddit movement is determined and has the capacity to create several other rallies. An action by the trading platform, Robinhood, to restrict traders met the ire of the public.

There is the obvious concern that some people will see an analysis of ‘hot stocks’ on social media and jump in without a full understanding of the fundamentals. Such people will have their fates up to pure luck. Profiting from these rallies calls for entry and exit at the right time.

The change is not just with small traders. Hedge funds have also learned that they are not the only fish in the sea. These institutions could be wary of placing large short positions in fear of retail investor action. Less shorting is not healthy as the market is overly optimistic.

Transformation through Decentralized Finance (DeFi)

Decentralized finance became a hit within crypto in 2020. These are financial applications built on the Ethereum blockchain. Decentralized finance provides a global, open alternative to every financial service in use today.

These applications range from lending, trading, savings, and even insurance. DeFi harnesses automation through smart contracts that provide accuracy and transparency. Smart contracts are digital contracts that self-execute upon both parties meeting their financial obligations.

Accordingly, blockchain finance eliminates the need for centralized supervision. Heralding back to the beginning of cryptocurrency, the excess power and recklessness of big banks are not popular with the public. DeFi offers a way to redistribute this power.

Cryptocurrency itself has had a fantastic year, so far. Bitcoin is close to the historic mark of $50,000, with major altcoins on a roll. It takes a bit to understand details like the blockchain, wallets, and exchanges, but it is generally a financial industry that seeks to eliminate centralized control.

DeFi is growing at a remarkable rate. At press time, the amount of value locked within this sector was about $40 billion. This industry could transform finance by easing lending and opening up access to millions. Similarly, it creates innovative financial products that improve society. That said, it is an industry that still needs to improve efficiency in certain aspects to compete with mainstream finance.

Conclusion

These trends in finance are a glimpse of the future. Digitization has levelled the playing field and allowed more people to access markets.

Small traders in droves can challenge hedge funds any day. Similarly, DeFi can gradually change finance for good. They should make for a fascinating watch

Luke Evans | My name is Luke Evans, and I work as a Web Developer. I am a professional coder and programmer who enjoys contributing to the exciting technical advancements. In 2016, I received a Bachelor's Degree in Software Development from California Institute of Technology. For my outstanding academic performance and leadership abilities while in school, I received the Edmund Gains Award in 2015.

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