2021 has started off in an unimaginable fashion, with terms like Reddit, WSB and GameStop being discussed and analysed on the biggest finance news channels, as well as becoming all the rage on social media. Of course, we are talking about the GameStop phenomenon, which has been fuelled by a Reddit forum, or subreddit, called WallStreetBets, and has led many people all over the world to frantically ask ‘what is Wall Street Bets’ to their friends, family and on social media as well. It seems as though this subreddit has claimed another victim, venturing into the world of cryptocurrencies as well to rival the likes of Bitcoin, Ethereum, Dogecoin and Litecoin, among others. We shall now attempt to explain this entire phenomenon, which has led to hedge funds and institutional investors literally being squeezed by people on a Reddit forum.
The WallStreetBets subreddit is a group where people usually post about their trades on the financial markets, but it is one where risk-taking is not only encouraged, it is a rite of passage and a requirement. Posts usually abound with users writing about putting their life savings into one stock, for example, or making similar high-risk bets in the hope of generating a huge payday. It has also become something of a meme, and WSB has become a term to poke fun at on Reddit and elsewhere on social media as well. However, over the last few weeks, these seemingly immature traders have managed to bring Wall Street to its knees to an extent.
GameStop is an American retailer of video games and electronic equipment, which was doing quite poorly over the last few years, largely due to the impact of online retail, as well as the effect of the COVID-19 pandemic over the last year. However, there had been news in September 2020 that the company had taken some fresh investment on board, which led many people, especially on the subreddit, to believe that GameStop could be undervalued. This fuelled a lot of interest in that group, as well as being piqued by the posts of one user, Keith Gill, whose Reddit username is DeepFuckingValue. This user had purchased call options on GameStop worth $53,000 in 2019, and the declining price of the stock continued to increase their value, with the investment being worth $48 million by the time the short squeeze took place. Gill believed that GameStop was extremely undervalued, and provided regular updates on his investment’s performance on the subreddit, with more and more people growing interested in GameStop as well as a result.
On top of this, Wall Street i.e. large hedge funds and institutional investors, had been shorting GameStop stock, to the extent that the stock was over-leveraged. 140% of GameStop’s market capitalization had been shorted, meaning that some people had lent their shorted shares and those shares had been shorted again. Shorting a share means that you borrow a share and immediately sell it, in the hope or expectation that its price is going to fall, and so when you have to buy it back, or ‘cover’ your trade, you end up making a profit. There was also a flurry of reports which predicted that GameStop would fall further, and this fuelled suspicions of a large-scale manipulation, wherein research houses were releasing reports that the share price would fall, causing it to fall, and thus benefiting institutional investors and hedge funds. The users on WSB decided to call out this bluff and began buying GameStop shares en masse, to drive up the price.
The price of GameStop increased by over 1,500% in just two weeks, going from around $20 to an intraday high of $483. For context, that was nearly 200 times the one-year low of $2.57 for the stock, and it even touched $500 in pre-market trading. This caused what is known as a short squeeze, where all those who had been borrowing and selling the share were now forced to buy it back at ever-increasing prices to cover their positions. Melvin Capital, one such hedge fund which had heavily shorted the stock, lost over 30% of its value due to this, and had suffered a 53% loss on its investments by the end of January. According to some reports, losses across the US financial industry because of this short squeeze topped $70 billion.
At the same time, Reddit and other social media sites were flooded with stories of traders who had managed to make fortunes in this time, and thus now had the money to pay off debts, credit card bills, medical bills, and other pending payments, while also having enough money left over to make a decent progression to their lives as well.
Traders on WSB also looked at other stocks to try and carry out a similar maneuver. AMC Theatres, a company in a similar position to GameStop, in terms of it being over-leveraged with short selling interest and a falling stock price, and thus a short squeeze took place here as well. Elsewhere, there was a lot of interest in Nokia and BlackBerry as well, since the two firms were perceived to have interests in GameStop. Indeed, there are multiple executives at BlackBerry who sold their shares in GameStop for millions of dollars during this time, while GameStop executives themselves have also seen the value of their shares skyrocket, with the CEO of GameStop, George Sherman, briefly becoming a billionaire when the price of GameStop reached $469. Other companies, such as Starbucks, American Airlines, Palantir, Virgin Galactic, Bed Bath & Beyond, and others, also saw significant increases in price, for similar reasons – they were heavily shorted on the market, and thus there was the opportunity to apply a short squeeze there as well.
These actions were also fuelled by the use of the popular trading app Robinhood, which is a brokerage app that has made it extremely easy for users in the US to purchase stocks. However, Robinhood stopped accepting orders for new positions in GameStop, along with a few other related and volatile companies, but users could still close their existing positions. This was followed swiftly by other brokerages, and led to calls of market manipulation on Reddit, social media and even from notable politicians, since the institutional investors and hedge funds were free to trade in GameStop, but retail traders were being blocked. These restrictions also led to investors then looking for other assets to trade in, which is where cryptocurrencies, as well as precious metals, came into the picture.
This phenomenon has created a real buzz in social media, with users realising the power that they possess as a group, with these actions likely to be repeated in the future as well, as we saw with the range of stocks that were targeted for similar actions. People, in general, have been frustrated for a long time with what they perceive as the ‘fat cats’ on Wall Street, who barely faced any censure for their role in the 2008 financial crisis, and have continued to, in the words of Democrat Senator Elizabeth Warren, treat the stock market ‘like their own personal casino’, being able to manipulate prices in this manner and take in the profits. Many commentators and observers believe that this event will lead to a reduction in the aggressive way in which hedge funds, in particular, have sold stocks short in the past. There has been an outcry about the way in which Robinhood has behaved during this time as well, while many observers have likened this to the Occupy Wall Street protests which began in 2011, but online, and with much more impact. This incident has also brought the power of the internet and social media to light, with people able to communicate with thousands of people all over the world, and thus causing actions such as this to take place rapidly.
Politicians such as Alexandria Ocasio-Cortez, the Democrat Representative from New York popularly known as AOC, Ted Cruz, the Republican senator from Texas, Rashida Tlaib, the Democrat Representative from Michigan, Marjorie Taylor-Greene, the Republican representative from Georgia, and Ted Lieu, the Democrat representative from California, all weighed in on the actions of Robinhood and other brokerages, calling it market manipulation.
This is unacceptable.
We now need to know more about @RobinhoodApp’s decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit.
As a member of the Financial Services Cmte, I’d support a hearing if necessary. https://t.co/4Qyrolgzyt
— Alexandria Ocasio-Cortez (@AOC) January 28, 2021
Proceedings have already begun in this regard, with various elected officials, as well as the Securities and Exchange Commission, announcing investigations into both the short squeeze that occurred in January, as well as the actions of Robinhood and other brokerage houses during this time.
The WSB subreddit turned its attention to Dogecoin, a crypto coin that was largely started as a joke and a variation on the popular ‘doge’ meme, which features a Shiba Inu, but has found some traction over the last year or so. The coin’s price rose by nearly 10 times, and is still at around 200% higher over the last week or so. Investors have also begun flooding into silver futures, causing the price of the precious metal to skyrocket as well, as they look for the next way in which to ‘screw over’ the rich and elite of Wall Street. In the latest development in this saga, users on the CoinMarketCap website, which tracks the price of cryptocurrencies, began to see a new coin at the top of the rankings – WallStreetBets. What is the Wall Street Bets (WSB) Coin?
The coin is priced at $483, and its market cap is at $24.8 billion, making it the largest cryptocurrency in the world by market cap, ahead of even Bitcoin, which is why it was on the top spot on the website. The coin also gained over 130% within 24 hours of ‘creation’, with daily trading volumes topping $100 million. However, this does seem to be a joke played by the CoinMarkets team, as there was a message on the coin’s page on the website which stated that this is a joke and no such asset exists. That should be a relief to many in the crypto space, who would have probably frantically trying to figure out how to buy WSB Coin. This practical joke, however, too, has multiple layers.
The message on the WSB Coin page on CoinMarkets has a reference to ‘Charmander-marth’. This is probably a reference to the CEO of Social Capital, Chamath Palihapitiya, who became viral on social media following an interview on CNBC where he spoke about his successful trades with GameStop shares during this period.
Bruhhh he keeps exposing their shit 😂😂😂😂😂 you heard it from @chamath the market is different and will continue to be volatile moving into the future… whose ready to be rich???? $cciv $gme $nakd $nok $Tesla etc… pic.twitter.com/Chake5mkTF
— MuzLM Trader (@MuzLM_Trader) January 27, 2021
The price of the coin is also a reference to the lifetime high of $483 that GameStop reached during intra-day trading, while the supposed market cap of $24.8 billion is also a reference to the stock’s performance during this time. Thus, it is clear that WSB Coin is not a real asset, and is in fact a joke played in the ongoing war between Wall Street and individual, small-time traders in financial markets. However, this fact does not reduce the number of people who want to buy WSB Coin.
Of course, this has also been fuelled by the general rise in interest in cryptocurrencies over the last year or so, largely due to the sharp rally that Bitcoin has seen. This has been seen as another way of ‘democratizing’ the financial markets, as regular people on the street have been able to invest in Bitcoin and have seen the value of their investments skyrocket, in the sort of situation which would previously only have been accessible to large institutions and hedge funds. It is no surprise, then, that the crypto market was targeted as well, both through this joke as well as through the rally seen in Dogecoin over the last week or so as well. It will be extremely interesting to see where this phenomenon goes next – as stated earlier, silver futures look like the next target, but the true impact of this has been to show the power of the internet and social media, as well as bring to attention the fact that the majority of working-class people in the USA, as well as the rest of the world, are not happy with the state of affairs at the moment, specifically the huge income inequality that we see in the world today, and this action is just one indication that the status quo will be challenged over the next few years.