The stock price of video game retailer GameStop is soaring, and there’s no good reason for it — if you ask the professionals.
But a group of traders that frequent Reddit’s popular subreddit r/wallstreetbets has given these pros the finger, and they don’t plan to quit anytime soon.
Here’s what’s happening: GameStop hasn’t been doing too great in recent years. Retail video stores are a dying business, and, typically, GameStop’s quarterly earnings results are so bad that they almost always cause the stock to plummet. This also makes it a heavily shorted stock (shorting means borrowing a company’s shares and selling them on the market with the hope you’ll be able to re-buy them cheaper later), with hedge funds like Melvin Capital making massive bets that GameStop stock price will fall.
For reasons not entirely clear, wallstreetbets has decided to turn the tide. They keep buying the stock, driving the price higher and higher — GameStop closed at $147.98 on Tuesday, up 650 percent from just two weeks ago, when it traded at about $20.
Wallstreetbets traders are also buying options (options are financial instruments that let you bet on where the price will be at a later date), which drives the price further up as it creates a positive feedback loop (a massive bet that the price will end up higher makes other investors bet the same, making it a self-fulfilling prophecy).
Some known figures have joined the fray, further fueling the buying craze. The world’s richest man, Elon Musk, tweeted “Gamestonk!!” with a link to wallstreetbets (stonks are company stocks in meme trader parlance).
Facebook and Gemini co-founder Tyler Winklevoss has been tweeting about GameStop too, saying the “GameStock $GME army is winning the war.”
Professional traders, for the most part, aren’t too happy about this. Investor Michael Burry, whose fund Scion Asset Management recently owned GameStop stock — meaning he’s probably making money on this rally — tweeted that the current rally is “unnatural, insane and dangerous” (the tweet was later deleted).
Similarly, Reddit groups have pushed up the stock price of BlackBerry, forcing the company to release a statement that it’s not aware of any change in its business that would account for the recent increase in the market price.
GameStop and BlackBerry’s price rallies have real-world repercussions. When you’re short a stock, like Melvin Capital is, there’s no limit to how much you can lose. As the price keeps pumping, it threatens to liquidate the shorters’ positions, possibly even drive some of them bankrupt. And yes, despite wallstreetbets’ enthusiasm, it’s quite possible that GameStop and BlackBerry’s price will plummet after this rally, leaving many meme-fueled hodlers in the red.
But one could also argue that the shorters are driving GameStop and similar companies bankrupt. Elon Musk is famously perma-angry at Tesla shorters, for example. And thus, fueled by memes, insider jokes, and the power of large numbers, began wallstreetbets’ quest to annihilate the shorters by driving the price up.
Amazingly, it’s working. Due to its GameStop short position, Melvin Capital is heavily in the red, saved at the last minute by a $2.75 billion monetary infusion from investment companies Citadel and Point72. The retail traders longing the stock are hoping to achieve a short squeeze, which would force the shorters to buy back the stock at high prices to close out their shorts and avoid liquidation.
Retail investors basically just shut a hedge fund down.
Citadel and Point72 are investing (backstopping) $2.75 billion into Melvin Capital who was superman short $GME GameStop
Melvin down over 30% in 2021
Melvin cap is run by Gabe Plotkin a Steve Cohen SAC protege— Will Meade (@realwillmeade) January 25, 2021
A bunch of small timers nearly taking down a massive, multi-billion hedge fund is unheard of, and that’s exactly what fuels the folks at wallstreetbets. They call themselves “autists,” and cheer each other on, share memes and make fun of the finance giants they’re up against. Similar movements are seen in the cryptocurrency world, where loose groups such as Link Marines constantly claim the price of cryptocurrency LINK will, should and must go up.
There’s a new way to make markets irrational, as wallstreetbets group’s ethos has shown, upgrading it for the social media era. Big players better get used to it.