You can’t stop GameStop. What does a declining brick-and-mortar store, Elon Musk, a multi-billion dollar hedge fund and a bunch of bored Reddit users have to do with each other? Have a look at this chart.
GameStop becomes a Meme Stock
GameStop is an American game retailer, mostly located in malls. It sells games in 5000 physical stores. Just like Netflix killed Blockbuster, GameStop is next in line to fade into obscurity. A global pandemic isn’t helping either.
Hedge funds took notice and started massively shorting the stock. They bet on the decline of the GameStop (GME) stock to profit from it. That’s until Wallstreetbets took notice and the stock shot through the roof.
What is shorting?
You think the share price will go down in the upcoming month, so you decide to short the stock and make a profit from the decline. Here is how it works.
- Let’s say the value of 1 share of GameStop is $100 on the 1st of January. You borrow 1 GameStop share from someone on the 1st of January and promise to give it back to them on the 1st of February (the expiry date).
- After receiving the share on the 1st of January you immediately sell it at the current market rate ($100). You now have $100 and no GameStop share.
- On the 1st of February, you have to return the share to the borrower. Remember, you don’t have the share because you sold it on the 1st of January for $100. So you buy the stock on the 1st of February for the current market rate and return it to the borrower.
- Let’s say the share did lose value and dropped to $50 on the 1st of February as you expected. On the 1st of February, you buy back 1 share of GameStop at the market rate of $50 and return it to the borrower. You now have $100 – $50 = $50 and made a profit. However, you can be wrong. Maybe the stock went up to $200. Now you have to buy the share for $200. But you only got $100 from the sale and you have to cover the other $100 out of your own pocket.
Short-selling is dangerous. If you buy a normal share for $100 the most you can lose is $100 if it goes to $0. But with short-selling your loss is unlimited as the stock can go up and up and up. And you have to buy at that price to be able to return the stock to the borrower. This can be problematic…
The Short’s get greedy
Melvin Capital Management, a multi-billion dollar hedge fund created a $55m+ short position in GameStop. But they got greedy, they started shorting more shares than existed. Users of Wallstreetbets found out about this, if they could increase the price enough, the short-sellers had to buy the stock for the inflated price because they needed the stock to return to their borrowers.
Wallstreetbets users found out that the short positions were so big that the hedge funds would be in big trouble if the price kept increasing. So that’s what they did. They kept buying more and more shares and refusing to sell. This drove up the price by 7000% in a couple of months and the hedge funds had to keep buying at these inflated prices to cover their short positions. Hedge funds started bleeding billions from their short positions. More and more users smelled an opportunity for fun and profit.
For Wallstreetbets, GameStop became more than a stock. It became a meme, a way to unite the WSB community, and a way to make a huge profit. In the process, they could screw over big Wallstreet hedge funds in a David vs Goliath style battle. They could finally get a (small) revenge on Wallstreet who screwed everyone over in the 2008 financial crisis and got away with it. Melvin Capital lost over $10 billion in just a couple of weeks and had to get bailed out by other funds to cover their losses.
Imagine working in a hedge fund and having to explain you are losing billions of dollars because of some teenagers trolling on an internet forum.
Wallstreetbets exploded with new users. With a constant stream of people telling to buy more of the stock. Stick together, and refuse to sell to increase the value. Elon Musk started tweeting about it and Wallstreetbets blew up with their own memes and lingo.
Going to the moon 🚀🚀🚀 Apes strong together 🦍🦍🦍 Diamond hands💎🖐