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Stoyan Todorov January 28, 2021 5 min read
How WallStreetBets Subreddit Drives GameStop Stock Rally
GameStop, an embattled and disintegrating games retailer, has been bolstered up by the efforts of a Reddit forum by the name of WallStreetBets, which sent the value of the company’s shares up by 2000% over the last month.
WallStreetBets Resurrects a Dying GameStop
After the flurry of excitement surrounding the WallStreetBets subreddit, the board has been taken temporarily private, adding confusion to an increasingly peculiar situation. Did Wall Street try to take the Reddit down or was there no foul play after all? The official subreddit message read simply as:
“We are experiencing technical difficulties based on an unprecedented scale as a result of the newfound interest.”-WallStreetBet subreddit moderator
If you are unfamiliar with the situation, take a look back a week ago when hedge funds were about to short-sell GameStop stock, decreasing its value further. It was then when a bunch of Redditors armed with a few stock-trading apps, targeting casual as well as veteran traders, decided to fight off the hedge funds incursions and send GameStop’s stock soaring instead.
With the pandemic affecting the seller of video games disproportionately due to mall closures, GameStop’s stock naturally languished, at a time when entertainment product buying was on the up. Motivated, amateur investors banded together to take on the likes of Steve Cohen and Dan Sundheim, who both suffered major losses.
Armed with a little more than Robinhood, TradeStation, and MooMoo – all stock trading apps – the Redditors managed to not only throw a spanner in the works of Wall Street but have also sent GameStop’s shares up nearly 2,000% within a month.
Just yesterday, the stock once again hit an all-time high jumping in value by $200 and reaching $350 in what can only be described as a meteoric rise. WallStreetBets went hard against hedge funds and traders trying to short-sell the beleaguered retailer which has been closing down properties for a while now. It plans to cut 1,000 out of its 5,000 shops.
Betting that GameStop’s shares would fall, traders found themselves the one to suffer losses when WallStreetBets’ anonymous mob rolled their sleeves up and said no to greedy capitalism, it seems. Unlike a bunch of traders looking to cash in on a dying retailer, WallStreetBets vowed not to sell any of their shares and encouraged each other to hold on to the stock.
The determination and zeal with which Redditors decided to support GameStop have been unprecedented. Yet, there have been some negatives as well, with Andrew Left, a short-seller who was the first to call the disintegration of GameStop coming, receive threats on him and his family.
Not Just GameStop, More to Follow
WallStreetBets is growing quickly enough. It used to be just 2.4 million followers hours ago, but it has since gone up to 4.2 million subscribers at the time of writing. The board focuses on sharing information about smart trades that people have made and actually brought them value as opposed to trades they wish they had made.
Another rule states that no politics should be involved in discussing trades. Yet, WallStreetBets isn’t stopping at just GameStop, as more stocks are now seeing the rallying cry of the subreddit benefit them disproportionately.
As one comment puts it, “Hedge fund managers live in the past and continue to look down upon the retail investors. This is the world they want to live in. This was the past.”
It’s still too early to tell if any of this is actually the case, as the lucky break with GameStop won’t necessarily replicate itself elsewhere, but if the trend catches on, short-sellers may be in for a choppy few weeks or months ahead.
Meanwhile, Redditors have been stoked to fight the status quo reporting eye-popping successes. One traded claimed to have turned a $50,000 investment in a $22 million payday. The drawback is that the platform is anonymous so such claims can hardly be verified unless actual proof is offered.
So, Why Are Short Sellers Suffering?
To explain it this way, when a short-seller says that a share is going to decline further, they are betting that it will lose value. Should a stock end up increasing in value, however, this causes chaos as sellers then have to snap up the shares, pushing their value further.
Why buy the shares you ask? When a short-seller is “short-selling” to you, they are basically selling shares they promise they would deliver at a later day because they don’t actually have them at the time of sale. If the shares begin increases, they are incurring losses, as they now have to hurry and buy.
If the share jumps by nearly 2,000% short-sellers are in real agony. This is precisely what’s happening. But then again, GameStop’s share has not increased in nearly three years, so is it going up because of something illegal?
According to Michael Burry who called the 2008 housing bust, there is a good chance that this is the case, yet evidence to support this claim is scant. However, Burry remains convinced that “there should be legal and regulatory repercussions.” Without actual evidence, though, the Securities and Exchange Commission nor any other regulator for that matter can do much.
Is GameStop a bubble? That is most likely the case, but all speculation aside, there were some winners during the recent trading bonanza.