Information Cascade of “Meme Coins”
As new forms of investing have risen in recent years through cryptocurrencies and apps that make trading easier for the common person, such as Robinhood, we have seen a great deal of investing in “meme stocks” or “meme coins”. These are where many people band together to try to make the price of the stock or coin rise when the point of value for the price isn’t from a growing company or valuable coin, but rather a joke that the masses want to partake in. Whereas in the past many people would rely on professionals to do the trading or to determine which stocks or coins to buy, this new ease of trading has allowed people to do their own trading. By allowing regular people to do their own trading, it seems as if they are making the decisions for themselves, however as we have seen from these “meme stocks” and “meme coins”, they often follow the crowd, causing an information cascade.
For example, Shiba Inu (SHIB) coin, is a “meme coin” that is based on dogecoin (another “meme coin” and has become the 11th largest cryptocurrency with a market capitalization of $22.58 B, yet the coin trades at a price less than one ten-thousandth of a dollar. The reason it has become so large is that there are many people who see the fortunes others have made from the coin and want to join. The large following of the crowd that is occurring with this coin is an example of an information cascade.
There are over 13,000 cryptocurrencies, any of which could blow up like SHIB, but due to the information cascade that has occurred, this coin is the one that has gained traction and exploded. An information cascade starts with just one person who makes a public decision, in this case, that decision is to buy SHIB on the belief that it will increase in value. While this first person’s decision could have been made by the information on the coin, others followed in buying the coin because they saw that someone else “had information” and acted on that information to make the decision to buy the coin. This pattern progresses and more people see that others are buying the coin, so they also think it will increase in value and they too buy the coin. Currently, the presence of social media has allowed this information cascade to grow because people can publicize their decisions more easily and prospective participants can view many people’s experiences with the coin. I have personally been in a room where I have heard people discussing whether or not to buy the coin and they said that other people think it’s going to increase in value so they should join the trend while they can. They did not do any research or gather any information for themselves, but they are relying on the information of the people who have already made the decision.
Source:
https://www.forbes.com/sites/ninabambysheva/2021/10/27/shiba-inu-on-the-doorstep-of-crypto-top-10-while-major-tokens-struggle/?sh=87d4615697fc