Decoding the GameStop Scene — 3
Welcome to the showdown, the part where we unleash the extravaganza that ensued before our own eyes.
Ever made internal jokes? We’re sure you have. But have you ever seen Internal Jokes shake the global industry by Billions of Dollars? Probably never except for the case at hand of GameStop X Reddit.
What started off as a normal post in r/wallstreetbets, quickly turned the global Stock Market on its head. At the centre of this stock trading frenzy is a battle between amateur investors and multi-billion dollar hedge funds.
A Reddit user by the handle name of u/deepfuckingvalue, A 34-year-old financial educator for a Massachusetts insurance firm in real life, started this whole saga with a post that sparked this wildfire. He shot to fame this week for turning an initial $54,000 investment in GameStop in 2019 into a $48 million fortune as of Wednesday. He posted a picture showing a $54,000 investment in GameStop. Though the post didn’t get any attention then, he frequently tweeted about the retail store and the investment. Subsequently, Ryan Cohen, an established businessman had also bought nearly 9 million shares of GameStop for a total cost of a whopping $76 Million (not to mention that by the end of last week his shares were worth a mind-boggling $3 Billion). This helped put things more into the forefront. Finally, last week, it caught the attention of many young online traders on the subreddit and the stock started getting unimaginable attention on Reddit.
So how did all this actually happen?
It is said that it is the fundamentals of a company which determine the market price of its share, but eventually, the share market like any other thing is also a game of supply and demand.
In this case, where people en masse start buying the shorted shares, a Short Squeeze took place. The bulk momentum of people rushing in to buy the shares pushed the price up.
How? Put yourself in the shoes of a short seller. You sold the shares and you know you ultimately have to return the borrowed shares. What if you see the price of the share you wanted to see go down, rallying up? You start panicking a bit and start thinking about buying the shares back to prevent further losses. But what if there just aren’t enough people willing to sell? Then you are panicking more and more until you are not thinking anymore but are willing to buy the shares at an even higher price so that you can make the deal lucrative enough to find a seller. Also, remember how call options is another way to turn in a profit and how the sellers of call options also start buying shares to protect themselves against unforeseen losses. And this group became another party of people who drove the prices even higher by buying shares.
And this is precisely what kept on pushing the price of GameStop’s share (apart from when Elon Musk tweeted “Gamestonk!!” which made the GameStop share to surge 50% in extended trade, along with a link to Reddit’s Wallstreetbets stock trading discussion group). Redditors united to invest collectively in the GameStop Stock knowing beforehand that the Hedge Funds who had shorted the stock would have to buy back the stock in Billions of Dollars. This coupled with countless People starting to buy the stock, led to the share prices increasing to unwarranted levels with the unprecedented rise of as much as 1700% within a week.
Short sellers lost an estimated $23.6 billion on GameStop in this rally. Melvin Capital lost 30 per cent of the $12.5 billion it invested in managing shorted stocks with many reports claiming the Venture had gone bust amidst this turn of events. Popular stockbroker Robinhood even had to temporarily stop the trading of GameStop and some other stocks to curb this type of volatility, a very rare occurrence. To top it off, the US CONGRESS had to get involved with the matter, with fellow Redditors calling this a historic moment and we might have to agree on this!
The subreddit has been organizing parties ever since and has gained an astonishing 5million members within a week, a sign of how big the story has become and how relentless the power of social media is. Reddit has always been a close-knit community of strangers, but this show of unity amongst users to take an internal joke to such a professional level and disrupt the whole Share Market is remarkable, to say the least.
It wouldn’t be surprising to see “The Big Long” starring u/deepfuckingvalue come out sometime soon, iykwwm :)
This ongoing turn of events has many takeaways for a keen Observer’s Eye. Along with some important human values like the strength in unity and teamwork, it is also a great anecdote to exemplify the volatility of the markets, opportunity costs(imagine having a long position on GameStop shares at the right moment), and the various unforeseeable factors that can have major effects on the market as a whole.
