weedfundhedge

The New Economy of ‘Pot Stock’ Day Traders Are Taking A Beating in the Market

They’re certain, however, that their fortune still awaits

Tom, a 29-year-old financial analyst who works in one of London’s most notable global consultancies, is sweating and swearing as he watches line graphs and fluorescent red numbers fluctuate on his computer screen. As he sips on a Corona, his eyes move between his monitor and a second screen attached to his wall on which he’s currently streaming the latest episode of the Joe Rogan Experience.

“Fuck, fuck, fuck,” Tom mumbles. He gets up from his custom ergonomic gaming chair and stumbles around his messy apartment in Bermondsey, among South London’s trendiest neighborhoods. His floor is covered in gym clothes and dress shirts from Hugo Boss and Prada. There are bills from utility companies notifying him of late payments, copies of The Economist and mugs half-filled with coffee, some of which have small circles of mold growing. He clears a mound of clothes from his sofa, sits down and pulls out a small packet of white powder and an old library card.

“You want some of this?” he asks me, holding up his offering.

Sources usually offer me coffee, water, maybe a cookie — but cocaine is a new one. I’m especially shocked because Tom doesn’t even smoke weed, despite making his living betting on global stocks of it.

Tom shrugs when I respectfully decline. “Suit yourself,” he says, dragging the powder into a small, thin line before inhaling it quickly. He’ll do this three more times during the course of our two hours together.

By day, Tom analyzes and writes market reports on more standard stocks — “natural gas, electric, precious metal” — the kinds you see covered in newspapers or on Bloomberg. In his words, the “bread and butter of anyone who invests.” But by night, Tom trades “pot stocks” online, a market that’s still obscure to most banks, hedge funds and investment firms, especially in countries like the U.K. where regulated cannabis markets for non-medicinal use are virtually non-existent. Tom trades these stocks on TC2000, a popular software platform among pot-stock day-traders that operates on a subscription model and monitors the activities of cannabis companies and pharmaceutical companies looking to invest in weed-related products.

Online pot-stock traders have existed since at least 2014, and though commercial interest in marijuana has existed for a while, their growth surged when Washington and Colorado became the first U.S. states to legalize recreational marijuana. In turn, investors started putting money into cannabis companies. In 2015, for example, Peter Thiel invested more than $100 million in Privateer Holdings, a Seattle-based private equity firm with stocks in some of the world’s largest cannabis development companies, including the Canada-based Tilray and Marley Natural, the former of which received a market valuation of more than $20 billion.

In other cases, however, investment in the weed business comes from guys like Tom, who invest mainly through penny stocks — or stocks with a low share price and small market capitalization, usually selling for less than $5 each. Most companies that trade through penny stocks do so because they’re too small to trade on bigger indexes like the NASDAQ, the NYSE or the London Stock Exchange. A couple of examples are Auxly, “the first and foremost streaming enterprise in the cannabis business,” and Global Cannabis Application Corp., which specializes in blockchain technology for commercial cannabis distributors. These businesses require less capital, and as such, individuals and small businesses trying to enter the cannabis market can seek small investments from just about anyone, and investors can put in money with virtually no regulation whatsoever.

If “penny stocks” sound familiar, that’s probably because you’ve seen The Wolf of Wall Street, a movie that follows the story of Jordan Belfort, a broker who used penny stocks to manipulate the market and run a “boiler room” — i.e., scams that routinely break SEC regulations and lose huge amounts of money for investors. While the global cannabis market is still too young for such sophisticated schemes, the Weedstocks subreddit, with around 77,000 members, is filled with stories of people who have made thousands of dollars in weeks just by investing in a couple of companies. And on YouTube, channels like Investor Palace, Bulls on Wall Street and Whiteboard Finance provide easy-to-follow tutorials for first-time weed investors. Meanwhile, other channels, such as The Chart Guys, put out shows daily that analyze the movements of weed stocks to tens of thousands of people — which guys like Tom watch in order to decide what’s worth investing in now, and what stocks they should look for in the weeks, months and years ahead.

“I’ve probably made around $4,000 over the past few months,” Tom tells me. “Though I’ve also lost a few hundred, if not a thousand.” He began investing in pot stocks at the start of the year after reading an article in the London Telegraph about Canada legalizing marijuana for both medicinal and recreational purposes — one of the only major countries in the world to implement such a policy. “Most people get excited because they think they can go to Canada and get high whenever they want,” he explains. “But I also saw an opportunity to make money, because I knew that companies would want to set up shop there.”

He was right. When Canada passed its legalization bill in July, the price of weed stocks skyrocketed. “Stocks in [cannabis companies] were going up by something like 10, 15 percent a day,” Tom says. “I’d be on my phone and see the WhatsApp groups buzzing with articles about new companies, new technology that they were developing and how big pharmaceutical companies were wanting to get involved. Like there was a day when Pfizer wanted to get in on cannaboid, and we were like, ‘Shit, there’s potential in this.’ It would have been stupid not to invest.”

He wasn’t alone. In September — a month before Canada’s legalization bill officially became law — a rush of new investors entered the market, known in pot-stock circles as “the green surge.” Almost any company that claimed to be involved in the production or development of weed found themselves with an influx of new cash, what veteran traders call “hot money.”

In just a few weeks, though, it’s all come crashing down. Blogs like Seeking Alpha note that stocks have declined by 30 to 45 percent, a decrease that it attributes, in part, to the last-minute rush of new investors who sought to buy up stock only to quickly sell it off at a much higher rate. “We need to be advocating lower, more realistic valuations,” the blog argues, adding that the losses might still cut even deeper. “After such big losses, the logical question is: Where is the bottom? With some stocks, I think the valuations are below market value. With others, there is far more room to go lower.”

Other analysts, such as CNBC guest contributor Mitch Goldberg, suggest that the reason behind the decline of cannabis stocks is rooted in the same history as every other hot, if fleeting cultural commodity — from the dotcom boom of the 1990s to the bitcoin boom over the past few years: There’s a “hyped up asset bubble” that has no choice but to burst once interest intensifies beyond sustainability. For his part, Mad Money’s very own Jim Cramer has warned that there was “too much money flooding into marijuana markets” and that investors had been in a period of “reefer madness… that is only going to end badly.”

Recent losses, however, haven’t deterred Tom, or his group of fellow investors, from playing the cannabis market. They still believe the market will level out, as fewer investors enter it with the intention of shorting stock, and as more countries like Canada legalize marijuana. “People are always going to want to smoke weed,” Tom says, as he prepares another line of cocaine. “You aren’t ever going to get rid of it, and you’ll eventually get to a place where you can get good quality weed from your High Street. Weed is something physical, and people know what it is. Once they trust the product, then you’ll see how it will become like any other traditional stock market.”

Jason Spatafora, an early weed investor best known for his blog Marijuana Stocks and his satirical nickname “The Wolf of Weed Street,” takes a similar big-picture view. “Unlike most other commodities, most activity regarding cannabis is concentrated in Canada. So if you’re a company based there, then that’s great. But if you’re an investor based in the United States or Europe, it’s hard to tell what’s actually going on. It’s hard to figure out how much of a [scarcity] of that commodity there is. And it’s hard to determine what the correct value of the stocks are.” As a result of poor information and sky-high valuations, Spatafora explains, it makes sense “why there would be investors who would make [poor] initial plays. To be successful in this market, you need to be playing a long game.”

For Tom at least, this uncertainty is also what makes investing in pot stocks “so fun.” After all, he says, “If I wanted to just make extra cash, I’d be trading minerals, or like oil futures or something.” Instead, it’s the culture of the pot-stocks community that has him coming back every night. “Everyone’s passionate about it, so when there’s an uptick [in a stock value], there’s just this huge amount of excitement. Even when things are going down, there’s that adrenaline rush, like, ‘How do I get out of this?’ Or: ‘How can I beat the market?’ I guess it’s the same as Bitcoin a few years ago, when it was still obscure and no one knew what it was about but everyone wanted in. Except with weed you can actually explain what you’re investing in.”

With that, Tom returns to his computer and puts on the green and red gaming headphones he uses to talk to other investors through their Discord channel. The numbers on the screen indicate that weed stock values are still going down, but Tom’s a lot calmer than he was a couple of hours ago. “Thank fuck it’s leveling out,” he says, pulling out a half-eaten Snickers bar from his desk and staring so intently at his screen that he forgets to say goodbye as I leave his place. He did, however, text me as I was heading home that night: “Looking forward to the article, and [let me know] if you want to do blow sometime.”