Wall Street It’s On Fire: What The Hell Is Going On?

The Wolf of Wall Street Are Here, They Are Called: WallStreetBets

JuanSC
JuanSC
Jan 27 · 6 min read
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2021 has not started anything normal for Wall Street. The latest shaking to practically residual values has been the protagonists of a story that could end in the Hollywood movie The Wolf of Wall Street.

The GME phenomenon (the symbol or ‘ticker’ of GameStop on the US stock market) is accentuated. Yesterday the stock was around $ 90. Today it is approaching 150 and growth seems uncontrollable. The investment fever fueled by the r/ WallStreetBets subreddit continues and is now spreading to other stocks, like BlackBerry.

GameStop is a well-known chain of stores selling video games, consoles, and accessories, and in recent times it has not had a particularly good time. A share was worth $ 62.11 in 2007, but in March 2020 it reached all-time lows: $ 3.50.

As reported in Wired, GameStop’s march seemed that of a company in an inexorable decline. Digital downloads didn’t help, and neither did a pandemic that kept away many people from visiting their stores to buy games.

It did not seem that its course was going to change too much, but so far this year the stock has become worth $ 90 (with peaks of 160) and has grown 400%. Behind this insane growth are apparently investors in a subreddit called WallStreetBets, who wanted to show that it is possible to make the stock market do very strange things.

Curiously, everything changed a bit when Ryan Cohen, the founder of an online pet food store, Chewy.com, bought a large number of shares and put pressure on its administrators to turn the situation around.

Source: The Wolf of Wall Street

His suggestions were not in vain, and in fact, GameStop decided to recruit Cohen and two of his colleagues at Chewy were joining the board of directors. The goal: to refloat the business with a clear focus on a much better online version of its stores.

That caused the shares to grow again significantly, reaching $ 18.84 at the end of 2020. The future looked bright for this company, and that created a major problem: It was going to cause huge losses for those who had taken short positions (shorting) and had bet that GameStop stock would continue to be worthless and less money.

That created a dangerous vicious cycle: Investors of this type began to buy stocks at increasingly higher prices to cover those short positions. Suddenly there was a fever to buy more and more shares but those who continued to position themselves short also continued to act because there were still people who thought that GameStop was going to end up falling sooner rather than later, as in the case of Melvin Capital. Do you remember? Melvin Capital took a short position on Tesla a long time ago and bragged about it. Would Elon Musk get revenge? Of course, he would. This is war.

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Photo by Scott Rodgerson on Unsplash

In all that process there was an unexpected and also potentially disturbing protagonist. It was WallStreetBets, a subreddit with more than 2 million members that claim to have fueled “rallies” or stock trading fevers that soared in value (or fell) thanks to the collective actions of its members.

That’s exactly what happened with GameStop: A short-positioned investor named Andrew Left announced on Twitter that he would later explain why stocks (which were at $ 41) were soon to drop to $ 20, and a few days later he would create a parallel account explaining that the previous one had tried to be hacked. He further noted that an “angry mob that owns these shares has spent the last 48 hours committing multiple crimes.”

The truth is that there are tensions between investors like Left and those who are part of the WallStreetbets subreddit, and that tension revealed a phenomenon that had already been explained by analysts in the past: “the market will be guided by a flow of capital, and not for the basics.” Or what is the same: it does not matter the action and the company they represent or the product they have behind, because enough investors investing enough money will be able to make it rise or fall significantly.

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Photo by Travis Essinger on Unsplash

On the WallStreetBet Discord channel, emojis of rockets rising and calls to buy shares of GameStop appeared last Friday. Members of that community seemed to be responding because the stock rose to $ 60 from a mere $ 20 a week ago. That day 194 million shares were transferred, 12 times more than the usual volume handled for this company.

Jaime Rogozinski, founder of the subreddit but who has had no relationship with it for a year, explained that for the members of that community “the sale of shares is like a video game.”

This user explained that the subreddit as such “really started as a meme. There they take a value, have fun with it, post images, videos and funny songs about it or whatever. GameStop started as a meme, but they took it to another level”.

Although the relevance of the implication of this subreddit is not clear — it is likely that there are other factors involved — the truth is that its impact seems evident. In fact, these days other companies like AMC, Blackberry, or Nokia seem to be experiencing similar situations.

Volatility, it seems, is not just a thing of bitcoin and cryptocurrencies, and phenomena like this seem to make it clear that even traditional companies can be exposed to staggering (and disastrous/beneficial) stock movements for investors.

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Photo by Jp Valery on Unsplash

And as I explained at the beginning, the thing does not end there. The investment fever fueled by the r / WallStreetBets subreddit continues and is now spreading to other stocks.

One of them is BlackBerry, which has seen its value tripled in a few days and went from $ 6.68 on January 1, 2021, to $ 18.81 today. As in the case of GameStop, the rise of BlackBerry is not supported by positive announcements from the company, which has confirmed that nothing justifies the rise.

It turns out that there is no logical reason, and the only thing that seems to be happening, as in the case of GameStop, is that a huge group of small investors is shaking the market with stock options and effective trading of Blackberry securities.

There is no justification behind that price increase. Even Blackberry itself says so. Meanwhile, on WallStreetBets, the reasoning is highly debatable “we could have Blackberry self-driving and electric cars in the next 5 years”, and the author complained about how rocket emojis and writing “in capital letters” were not a very convincing way to argue that investment recommendation.

But he also warned. “It’s dangerous to be the one who says no all the time these days.” Melvin Capital, a prestigious investment fund, has been the main victim of what happened with GameStop: they bet that the stock would fall and suddenly they found themselves with a 30% loss on that bet. To try to make up for the losses they needed a $ 2.75 billion bond from other fund managers, and some say that if GameStop’s value continues to grow, this fund could end up going under.

That stock is still climbing in fact, in part thanks to messages that Elon Musk, founder of Tesla and SpaceX, and Chamath Palihapitiya, former head of Facebook and now CEO of Social Capital, posted on Twitter to seemingly encourage everyone to invest in GameStop.

The reasons for Palihapitiya are unclear, but according to some users Musk’s message is revenge: “Melvin Capital took a short position on Tesla a long time ago and bragged about it.” That is to say: Melvin Capital bet that Tesla would fall in valuation and relevance, and in fact, the data reveals that indeed the investment of that fund in Tesla was going in that direction and it seems that Musk could have wanted to take revenge, although that — as in the past — it could end up costing him a lawsuit.

Source: Twitter

The truth is that the progress of GameStop and BlackBerry shares has shown the weaknesses of a system in which a partially coordinated action (or at least, viral) can achieve seismic effects in various companies and economies.

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JuanSC

Written by

JuanSC

An engineer from Barcelona. Start Small, Think Big, Scale Fast. Twitter: @thejuansc

The Startup

Medium's largest active publication, followed by +775K people. Follow to join our community.

JuanSC

Written by

JuanSC

An engineer from Barcelona. Start Small, Think Big, Scale Fast. Twitter: @thejuansc

The Startup

Medium's largest active publication, followed by +775K people. Follow to join our community.

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