It’s just another day in 2021. Where a subreddit has sent Wall Street into a frenzy and a video-game retailer – GameStop – on the verge of collapse has seen its stock soar 400 per cent this week. And of course, as most things in this age, it all started with a meme.
What is it that I should know about GameStop?
GameStop is a video-game retailer whose business has suffered over the past year. Not surprisingly, people are buying games online than heading to stores in malls. However, it was in dire straits even before the pandemic, struggling to compete with digital marketplaces. As the company was floundering, many analysts on TV and social media suggested “short selling” the stock to make profits.
Umm, what is short selling?
Usually, when someone buys a stock, they are expecting its price to go up. So if you buy a stock for 10 and sell it for 20, you make 10 bucks. But short selling is where you are expecting the value of a stock to fall, either because of a poor business model or annual performance and so on. So the more the stock falls, the more money you make. Hedge funds like Melvin Capital and Citron Research, among others, held “short” positions running into millions of dollars on the stock and were looking to make money as the share-price kept falling. However, a bunch of Reddit users were not having this.
How the hell did Reddit come into all of this?
A bunch of members on a subreddit with over two million users, called WallStreetBets, started joking about GameStop’s dire situation. Then came the clarion call: They will take “GameStop to the moon” by betting against the Wall Street hedge fund and other short sellers of GameStop. The internet mobilised and they pumped up the stock high enough to trigger a mind-boggling short squeeze.
As short sellers have bet on the stock price going down, a rise is not a good thing because they stand to lose more and more money as the stock price surges. “What started as an ‘idiotic enthusiasm’ (a term used by one Reddit member of the group) turned Wall Street upside down and left some of the biggest investing minds scratching their heads. At the high point of the day on Monday, shares of GameStop, which was sleep-walking to bankruptcy, had logged an eye-popping 779 per cent gain for January thus far,” the Economic Times reported.
Why were the WallStreetBets peeps thinking?
Many members of the subreddit bought the stock in solidarity, as a rebellious act against Wall Street. They chanted YOLO and shared the rocket emoji to show their support. “Hedge fund managers live in the past, and continue to look down upon the retail investors. They truly believe that we, the average retail investors, do not know anything about finances or the market (which may be true), and we're just gambling our money away,” posted BenAffleks on WallStreetBets.
Did it work?
For now, yes. Wall Street Journal reported that Citadel and Point72 will bail out Melvin Capital by investing $2.75 billion in the hedge fund after it booked heavy losses. Citron Research also took a heavy beating, as its short bets on GameStop were running a marked-to-market loss of nearly $2 billion. While the short sellers lost crazy amounts of money, many become millionaires overnight. Elon Musk and Chamath Palihapitiya tweeting about GameStop has drawn further attention to the stock. Chamath’s tweet sent the stock soaring another 93 per cent on Tuesday. Other previously sinking stocks like AMC Entertainment Holdings Inc, Blackberry Ltd, Nokia Oyj have also seen big gains as Reddit revolts.
A minute’s silence is due for fund managers who will have to explain to investors that they lost a ton of their money to meme reddit traders. Let’s just say 2021 has been a really bizarre year so far.