When Main Street Visited Wall Street
By now you’ve probably heard about the “geeks sticking it to the Wall Street elites” or if you read “definitely super unbiased” CNN you probably rather heard the story along the lines of “White Supremacists rob the homeless of their pensions”. If you still don’t know what is going on strap in and let me tell you a story…
September 2019, GME trades $4.00 to $5.50 a share.
We begin our journey in September 2019, yes more than a year ago! A person going by the alias DeepFuckingValue posted a screenshot of some of his trades on the Reddit channel r/wallstreetbets. I’ll skip over the technicalities of his trades, but in essence he was betting that a company called GameStop (GME) would make large gains in value by 21 January 2021.
The r/wallstreetbets users refer to themselves as “degenerates” so I am referring to them also as such.
These trades DeepFuckingValue posted initially baffled many of his fellow degenerates. GME was a company that Wall Street was betting would go down in value and there was no obvious reason it would go up. DeepFuckingValue held a different view though. He told the other degenerates that the company is undervalued and the shares are worth at least $8 — that is at least 25% more than its price at the time.
DeepFuckingValue would keep on posting a screenshot of his trades for GME on reddit about once a month with the caption YOLO.
September 2019 to August 2020*, GME trades for $3 to $6 a share.
Over the year that followed GME not only survived, but gained value. Why was this company Wallstreet doomed to go down, not going down? So some of the degenerates dug a little more into the company.
It turned out GME was not a sick company at all, but in fact had enough cash on hand to cover all their debts and still have money left after that. DeepFuckingValue may have been right about it being undervalued.
The question then became, why would a healthy company trade for $2 to $6 a share instead of the $8 that DeepFuckingValue suggested?
Enter the short…
Before we can continue our journey there is a piece of trading jargon that you need to understand, namely the short.
For those who don’t know what a short is, here is a very brief explanation: sometimes a trader would think a company’s share price will go down and he would like to make some money if it does. This trader then borrows a share from someone else. The trader then sells this share at the current market value. When the company’s share price then falls he would buy a share back and give that share back to the person he borrowed it from along with a small fee.
E.g.
- Step 1: Jack borrows a share for company XYZ from Jill.
- Step 2: Jack then sells this share for let’s say $1.00.
- Step 3: A month later the share price for XYZ falls to $0.75 and Jack buys a share.
- Step 4: Jack gives the XYZ share back to Jill as well as a fee of, let’s say, $0.05.
- Jack made a profit of $1.00 — $0.75 — $0.05 = $0.20 and Jill made $0.05 with a share she in any case would not sell.
Back to the story…
Why was GME trading so low? To answer the question the degenerates looked into the shorts that were taken out on GME. It turned out that some hedge funds have taken out a short position on GME totaling 140% of the total shares of GME. The implication was that at some point these hedge funds would have to buy back 140% of the total shares of the company!
Even more mind boggling was that about 75% of all GME shares were not actively traded. That meant the hedge funds had to borrow and sell each available share an average of 5 to 6 times! Selling 5 to 6 times the amount of the total shares traded would explain how the GME share price was pushed so low under the $8 that DeepFuckingValue thought would have been fair.
This made it obvious that the hedge funds weren’t just betting that GME would go down in value, but they were probably betting that GME would go bankrupt! Their short position on GME drove the share price much lower than what it was supposed to be. It also spread an unwarranted negative outlook on the viability of GME to the rest of the market.
In short the hedge funds warped the reality of GME’s value in the hopes of making a profit from GME’s artificially induced demise.
September 2020 to 20 January 2021, GME trades at $6 to $40 per share
Enter the short squeeze…
The cat was out of the bag now. Due to the hedge funds’ bet that GME would decline, GME shares no longer represent the value of GameStop the company. The degenerates followed the logic and concluded that GME shares now had value because the hedge funds promised to buy it back.
Armed with the proper understanding of the current reality the degenerates started buying GME shares (and also options, but since this is already a very long post I won’t go into what an option is in this post).
This started pushing the price up. And since reality is turning out differently to what the hedge funds were betting it would, the hedge funds started losing money on their shorts. This forced them to buy some of the GME stock at high prices to make good on the promise to give back the shares they borrowed. This rise in price when you have a short position is called a short squeeze.
21 January 2021. GME trades at $40
DeepFuckingValue the degenerate that seems to have started this all gets his GME shares. Eighteen months ago GME was trading at ~$4.00 and he thought a true market value would have been $8.00. Now it’s trading around $40, but the ride is not over yet! By 27 January 2021 he would have turned his initial $53,000 investment into $48,000,000.
22 January 2021 to present. GME trades at $40 to $480 per share
With the original degenerate’s bet paying off so well the other degenerates started getting even more excited about this ongoing saga. The price jumped from $40 to $90. Even more people join the degenerates’ community. They adopted the slogan “we can remain retarded for longer than they can stay solvent”, a play on an old trader nugget of wisdom “the market can remain irrational for longer than you can stay solvent”.
Elon Musk tweeted “Gamestonk!” with a link to the degenerates’ Reddit page on 26 January 2021 and their community explodes along with the GME share price. GME would trade for more than $300 a share the next day.
Since then there has been a lot more shenanigans happening. Some of these include:
- the gamma-squeeze that the short-squeeze triggered
- on-the-fly liquidity requirement changes from Wall Street to try and curb this
- Robinhood (an individual trader app) stops, and then partially resumes, trading of GME
- the degenerates are taking on silver
This is not the end of the story yet, but this is how it started
