The Meme Said Let It Hit 420.69. Today, It Hit 420.69
Less than one month in and 2021 has taken a turn for the crazy. Because a company that sells videogames and action figurines has somehow become the face of a financial revolution. Gamestop, as any gamer knows, is a store that’s been the primary hub of video game retail for quite some time. But like Blockbuster before it, GameStop has been seeing much of its business dwindle over the years due to online sales. Seen as a dying business on its last legs, GameStop had become prime for pickings for big Wall Street Hedge funds — places such as Melvin Capital, which we’ll get into a bit later — where Wall Street investors bet against the stock of GameStop in what’s called a short. Which is how we got into this situation in the first place.
The Big GameStop Short
Margot Robbie wasn't available to explain this GameStop situation in a bathtub, so this is the best we could do. pic.twitter.com/Mw1dabmIzQ— The Daily Show (@TheDailyShow) January 28, 2021
So to understand a short you have to understand the basic way a stock works. Which is that a company like GameStop goes public and sells tiny bits of ownership of said company using a made-up value holder called stocks. A stock price generally is meant to go up the better a company performs, meaning it earned money and is financially healthy. When a stock price goes down, that usually means the company is performing poorly or unable to pay back its debt. Which brings us to GameStop now.
Most basic investors bet that a stock/company will do well. They buy their partial ownership in a company and the better it does the more profitable the stock is when it’s sold. However, there is a type of trading known as a short. Which is a unique type of higher-risk bet that can garnish more short term returns if pulled off correctly.
In short, a person borrows someone else’s stock, sells it at its market value (i.e. 1 Gamestop at 5 bucks), and then buys the stock back later to return to the lender (i.e. 1 Gamestop at 4 bucks). They then pocket the difference so long as the stock drops in price. But there’s a big catch: if it doesn’t drop in price then the short seller owes the lender money. Worse, if it keeps growing there’s a possibility for an infinite loss because stocks can infinitely rise.
This is where hedge funds, whose capital backing is a lot more secure than your everyday trader, comes into play. Because the 420.69 memes, and really the entire WallStreetbets Reddit forum, basically screwed them over and is robbing them blind doing what we call a Short Squeeze. All using the same methods Wall Street has been using to take advantage of everyday people for years.
Short Squeeze To The Moon!!!!
So, a short squeeze is when institutions who short-sell a stock, like Melvin Capital, have to purchase more shares in stock (not short sell) to cover their losses. In layman’s terms, they’re buying the very thing that they just borrowed temporarily, in hopes of stalling for time. At least, until the market inevitably goes back down so that they can sell and make a profit.
If you think this is stupid, I absolutely agree, but this is quite literally the method of moving money around in Wall Street which generates profit in our financial institutions. The fact that GameStop hit these prices this morning, mostly for the lulz to say we achieved 420.69, is even more hilarious and makes this even bigger of a joke.
When a short squeeze happens, stock prices go up because not only are the buyers buying stock but those shorting are as well. The goal for the short-sellers is that people will eventually pull out for the profit, letting them make money back on the ride downwards. Until that happens, many hedge funds just keep pumping money into the stock. This why you are seeing a lot skyrocketing prices. Though eventually, they will need to pull out if things get too dicey. Say, by a renegade group of Reddit enthusiasts who completely pushes them out of all of their shorts (or so they said). Enter Wall Street Bets.
Wall Street Bets: Like 4chan Found a Bloomberg Terminal
Image Credit: From R/WallStreetBets where you’ll find plenty of memes and art such as these
Wall Street Bets is a subreddit of 3.5 million users who discuss speculative stock trading and strategy. It started out as a meme that gained a ridiculous amount of popularity. The group talked since the beginning of the year about strategies on targeting several short-squeeze opportunities. Gaining popularity online, NBC tv personality Jim Cramer of Mad Money, started reporting about what was happening. A Wall Street Vs. Online Traders debacle which, for weeks, hyped many day traders into pumping it until the stock. Like any good movement, it began to snowball. Which brings us to where we are today.
Atop of this, major venture capitalists had begun supporting the movement. Chamath Palihapitiya jumped in on the investment, and even the richest man in the world, Elon Musk, retweet an endorsement. #GME shares began skyrocketing, and even today, Mark Cuban admittedly vocalized his support for the movement. Just about every politician, oddly enough from both sides of the political spectrum, have an opinion about what’s happening. Why? Well, because the direction of the stock price was never supposed to be dictated by a unified everyday people, regardless of the fact that major financial institutions have been doing the same thing for decades. As of writing this, Gamestop (GME), along with AMC, BB, BBBY, EXPR, KOSS, NAKD, and NOK have now become heavily regulated in terms of its allowance of purchase orders. Some applications such as Robinhood even outright halted buy orders. All done to essentially stop what WallStreetBets has started.
But The Truth Is We’re Possibly Just Ponzis in a Game Of 5D Chess Amongst Billionaires
Look, truth be told, even though a lot of us love the movement this is historically uncharted territory. A lot of the social media posts and shared standings (including positions I’ve seen on WSB) is sort of a form of insider trading. Because you can’t be a billionaire and infer your positions in the markets. That should fall under insider trading. Then again, so should the sudden freezing of the ability to purchase these unprecedentedly bullish GameStop stocks at the same time your parent financial company, such as Citadel, decides to short-sell that same stock immediately at market (which is what Robinhood did today and is now facing a lawsuit).
Atop of this the hedge fund that was being initially targeted for shorting $GME was Melvin Capital. Which is important because it’s run by a guy named Gabe Plotkin. A capitalist who has publicly, for years, been known to make most of its money shorting companies in bearish markets. One of Plotkin’s biggest shorts in the past few years was against the now recently bullish Tesla Motors. Which is why something like this suddenly happened:
Gamestonk!! https://t.co/RZtkDzAewJ— Elon Musk (@elonmusk) January 26, 2021
One day later, Gabe Plotkin and Melvin Capital are forced to sell all their shorts on GameStop. Making this, unofficially, Elon Musk’s bit of sweet revenge against Gabe Plotkin for years of undercutting of Tesla. Coincidentally, Musk is also now the richest person in the world as of 2020. I’m not saying for certain that this is the reason why this all played out this way, but it was definitely a big moment for when the shares began to skyrocket. Melvin Capital lost tremendous amounts of money and required a bailout. By whom? Point72 Asset Management and Citadel. Yes, Citadel, the very company that funded the Robinhood application that began freezing the GameStop purchase orders which virtually all of the WSB traders had been using.
Where Does GameStop Go From Here?
On the WallstreetBets forums, you’ll find memes saying ‘never sell, never surrender’. All with rocketships saying ‘through the moon!’ The truth is, as ridiculous as this sounds, this joke became the face of our financial institution. The fact that 420.69 was not just a rallying cry but an actual achievable goal of the poor winning over the rich, is absolutely hilarious. Then again, thinking about our presidency for the past 4 years, this goes to show that there is something fundamentally flawed, and even outright stupid, about this entire system.
I fully support WSB and the everyday person. I also think what’s happening is exactly the right way to Occupy Wall Street. I’m also not the only person, as surprisingly AOC, Ted Cruz, and even Donald Trump Jr., all seem to be in agreement: how this was a perfectly legal free-market opportunity to finally stick it to Wallstreet. Atop of this, AMC used the opportunity to liquidate off some of the debt. I’d be surprised if GameStop and some of these other companies in the short squeeze didn’t do the same. For those naysayers who say THIS MEANS NOTHING for retail, I am telling you right now: you’re wrong. It means quite a lot for these dying businesses who now have a lifeline to get out of some of that debt (GameStop if you’re reading this, please double down on your online retail). It’s also, if you’re smart about it, a great way for the average person to earn a quick buck during hard times. Though please cover your investment and don’t go all-in on your life savings for what’s essentially the stupidest and most brilliant flash of capitalism of our lifetime.
Whatever comes next is sort of up to both businesses and speculative traders to decide. I hope they choose wisely.