“Dive into the wild world of penny stocks with our in-depth exploration of Bit Brother’s crypto ventures. Discover the surge in trading volumes, the risks of heavily-dilutive fundraisings, and the regulatory challenges facing these low-priced shares. Uncover the unique dynamics driving this market phenomenon and gain insights into the evolving landscape of penny stock trading. Join us on this rollercoaster ride where retail investors, dilutive fundraisings, and regulatory scrutiny converge in the ever-changing realm of finance.”
Introduction:
In the dynamic landscape of the stock market, where giants like Tesla often dominate discussions, an unexpected player has emerged – Bit Brother, a Chinese tea retailer turned cryptocurrency miner. In the last two months, this obscure company, with a market value less than $2 million, has overshadowed even Tesla in daily trading volume. Averaging a staggering 572 million shares changing hands each day, Bit Brother’s ascent is emblematic of a unique trading boom happening in the realm of “penny stocks” – shares valued at less than $1 each.
The Penny Stock Phenomenon:
The surge in activity within the penny stock arena has witnessed a significant spike, constituting nearly 20% of overall stock market volumes in December, and maintaining a robust 14% in January. This surge, according to Cboe Global Markets, marks a substantial increase from the historical average of around 6%. What sets this trend apart is the focus on trading volumes rather than share prices.
Driving Forces Behind Penny Stock Mania:
Retail traders, initially enticed by the 2021 meme stock craze, are actively participating in the penny stock frenzy. Unlike the previous craze that drove share prices to unprecedented highs, the current trend is primarily fueled by increased trading volumes. One contributing factor is the growing popularity of controversial equity fundraisings that flood the market with new shares.
Larry Tabb, Head of Market Structure Research at Bloomberg Intelligence, notes that retail investors are drawn to low-priced stocks, hoping for minimal price movements to yield substantial gains. However, he cautions that it’s a precarious game, often leading to losses.
The Role of Heavily-Dilutive Fundraisings:
Companies like Bit Brother and Mullen Automotive have engaged in heavily-dilutive fundraisings, leading to a surge in share counts. Bit Brother’s recent $12 million share and warrant sale could potentially more than double its outstanding stock count. Mullen Automotive, despite being a penny stock, topped monthly trading leaderboards five times in 2023, even as its shares plummeted 99%. Share-based fundraisings expanded Mullen’s share count to 50 times its level a year earlier.
Risks and Consequences:
The consequences of such fundraising activities are evident as US-listed companies trading below $1 have surged to 517, compared to 77 a year ago. Almost one-third of these stocks have seen their share counts rise by at least 50% over the past year. Unlike the previous meme stock craze, where retail investors saw substantial gains, the current scenario is marked by declining share prices despite positive news and increased trading volumes.
Convertible Debt Deals and the “Death Spiral”:
To secure financing, many small firms resort to convertible debt deals, allowing lenders to be repaid in cash or new shares. However, these deals often result in a “death spiral,” where lenders convert their debt into shares and sell them in the market, driving down share prices further. This downward spiral is fueled by retail traders purchasing these newly available shares.
Regulatory Challenges and Delisting Threats:
As penny stocks face the risk of trading below $1 for extended periods, major exchanges may delist them. This has prompted some companies to undergo reverse stock splits, temporarily boosting share prices but potentially signaling weakness to shareholders. Bit Brother, for instance, underwent a 1,000-for-1 split in January, only to see its shares more than halve to just under $3 since then. Mullen Automotive conducted three reverse splits in 2023, yet its shares closed at $6.97, down around 50% this year.
Nasdaq’s Role and Criticisms:
While both NYSE and Nasdaq host penny stocks, Nasdaq, with its acceptance of smaller and less-established companies, houses the majority. This has sparked criticism, alleging that Nasdaq might be prioritizing listing fees and trading revenues over scrutinizing the suitability of certain stocks. Nasdaq defends its practices, citing SEC-approved rules designed to protect investors, ensure market liquidity, transparency, and facilitate capital formation.
Bit Brother’s Nasdaq Delisting Notice:
In a recent development, Bit Brother disclosed a delisting notice from Nasdaq, citing concerns about warrants with cashless exercise provisions in recent fundraisings. This raises questions about the company’s compliance and will be subject to a hearing later this month.
Conclusion:
The surge in penny stock trading volumes, led by companies like Bit Brother and Mullen Automotive, underscores the evolving dynamics of the stock market. Retail investors, initially captivated by the allure of quick gains, are now navigating a volatile landscape marked by dilutive fundraisings, convertible debt deals, and the looming threat of delisting. As the regulatory spotlight intensifies and market participants adapt to these challenges, the penny stock rollercoaster continues to ride high, offering both risks and opportunities in the ever-changing world of finance.
Disclaimer:
The information provided in this blog is for informational purposes only and does not constitute financial, investment, or trading advice. The content is based on publicly available information as of the date of writing, and we make no representations or warranties regarding the accuracy, completeness, or reliability of the information.
Trading and investing in financial markets, particularly penny stocks, involve risks, and past performance is not indicative of future results. The volatile nature of penny stocks, dilutive fundraising activities, and regulatory challenges can lead to significant financial losses. Readers are advised to conduct their own research and seek the advice of qualified financial professionals before making any investment decisions.
The authors and publishers of this blog are not responsible for any actions taken based on the information provided. We do not endorse or recommend specific companies, stocks, or financial products. Readers should be aware of the inherent risks associated with trading in the stock market and carefully consider their risk tolerance and financial situation before engaging in any investment activities.
Additionally, the blog may contain forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those expressed or implied in these statements. The authors are not liable for any direct or indirect damages, losses, or liabilities arising from the use of or reliance on the information presented in this blog.
