The #OTCSET didn’t arrive here in a vacuum, it’s the butterfly effect and the natural order of the universe doing their thing. For decades an OTC shell was looked at as having very little tangible value if it wasn’t attached to a viable company and even if there was a legit business, trying to raise capital on the OTC is historically very challenging and often nearly impossible without resorting to toxic loans.
Whether it’s a legit company or not, the historical odds of long term success in the OTC are so low that betting against these high risk junk stocks has always been a wildly lucrative business, especially if you are able to sell air shares (shares they don’t own and can’t borrow) like market makers can do. With the odds of a stock eventually going to 0 being nearly 100% (especially with their help, ie predatory toxic lenders in bed with certain market makers and hedge funds), market makers can sell as many shares as they can possibly find and even shares they can’t find (naked shorting) and absolutely clean up over time. What does it matter if they never have to buy them back? Or can buy them back at fractions of pennies on the dollar?
The problem with such an aggressive and highly leveraged approach to shorting is you better hope and pray that a paradigm shift doesn’t suddenly change the landscape entirely. GameStop is the epitome of that, but we’ll get into that later. For now, let’s stay focused on the #OTCSET.
Stocks which are deemed to be junk being naked shorted into oblivion for decades was just the primer for the formula. Next comes the paradigm shift that slowly (and then suddenly) causes a major shock to the system. 2021’s OTC rally was the first symptom indicating that something major had changed. The OTC requiring old defunct shells and tickers to either clean up their act or lose their ability to be publicly quoted meant that suddenly hundreds of essentially worthless shells now suddenly at least had a little bit of potential functional value in the fact that they now could be used as a vehicle for mergers and acquisitions. That’s why so many had their 2021 era blowups and that’s why so many dead charts suddenly made new secular higher highs. But eventually the market was flooded with shells which were overbought and expensive so for the next 2.5 years they all crashed back down to earth. That’s the end of the story. Right?
The 2021 bull market in the OTC represented a rebirth for an army of shells, but since that mania entirely fizzled out retail traders have largely moved on. What’s not being overly discussed though is that the demand for these shells has been and is still growing and hitting all time highs for reasons which go well beyond the OTC. Look around in the OTC and virtually everything of interest is a shell or former shell being used as a vehicle for mergers, acquisition or joint ventures. Businesses, especially foreign ones, are desperate for accessing US capital markets and they’re using these shells to gain access. It’s a win win scenario for both the shell owners and the businesses merging or being acquired.
There is more demand for a clean shell these days because there’s more demand than ever for access to US capital markets (dollars), which is exponentially more true for foreign businesses being harmed by their weak currency vs the strengthening dollar. Not only will you see more and more mergers with these shells, but a disproportionate amount of them will be tied to foreign private companies desperately looking to access US capital markets. This is the paradigm shift which is changing the status quo and will spark a movement, or should I say will spark the continuation/confirmation of the movement which began around 2021.
Historically reverse mergers weren’t very common and shells only had so much value because of that limited demand. The drastic change in the macro landscape however is making these shells more valuable by the day. If a clean shell might have been valued in the $500K – $1MM range previously, now I’d argue that should be much higher. At some point the value will become more obvious to these shells in general, and that will spark another run on these shells as people try to front load the rallies. The better the market is for these shells from traders and investors, the more incentive it gives to the private companies to find a shell to merge with as the strong market means raising capital with greater ease. This means there’s incentives for real companies with real growth potential to merge with these shells, not just fly by night scam CEOs. In fact I’d argue that some of these shells have so much potential value for the right buyers that they will naturally attract more legitimate suitors and the scammers will in theory get priced out of the cleanest and strongest shells. The #OTCSET is all about trying to identify which are the shells which could provide the most value and in theory would attract some of the best mergers, acquisitions and management.
The first question everyone needs to be asking is “was 2021 the peak of the mountain or just the first leg up of a much larger one?”. The underlying factors are all there. The worthless assets that suddenly become valuable, the overexposed shorts who were banking on said assets to go to zero and never having to cover their shorts, and all that’s left is for the retail market to catch on and light the fuse.