The strange story of Gamestonk

by | Feb 3, 2021 | Economy, Policy

You don’t have to closely follow the stock market to know that something’s been up with GameStop. In one of the most bizarre financial stories of recent years, the stock price of a failing company shot up by 2,800 percent, hedge funds lost billions, some plucky Redditors got rich overnight, and politicians from both parties actually agreed on something. This is the story of Gamestonk. 

Gamestop is a video game retail company based in Grapevine, Texas. As a brick-and-mortar retailer, it was on the decline due to video game sales shifting online. And that was before the pandemic. I for one haven’t gone to Gamestop in nearly four years in spite of the fact that I still play video games. In fact, I can remember the last time I set foot in Gamestop: in 2017 I bought physical copies of Mass Effect 2 and 3. The only reason I did that is because at the time neither game was available for download on the Microsoft Store (they are now).  

Gamestop’s predicament caused Wall Street investors to circle it like sharks smelling blood in the water. Hedge funds began short-selling Gamestop, which basically means they were betting against it. When you short a stock, you borrow shares and sell them at the current price. You then buy shares to replace the borrowed ones at a later date, and if the price has gone down then you profit. Of course, the risk is that you lose money if the stock price goes up, and you can lose a lot of money that way. But Gamestop seemed poised to go the way of Blockbuster, so hedge funds were confident as they heavily shorted the company. 

Enter r/wallstreetbets (WSB). WSB is a forum on the popular website Reddit that describes itself with the tagline “like 4chan found a Bloomberg terminal” (if you don’t know what 4chan is, it’s where QAnon came from). The subreddit is full of amateur investors, who often refer to themselves as “autists” and “degenerates,” engaged in risky “yolo” trades that fly in the face of conventional wisdom. It’s an odd mix of in-depth financial analysis and edgy memes. WSB even has its own slang, such as referring to “stocks” as “stonks” and using the term “diamond hands” to refer to holding onto a stock. 

 WSB realized that Gamestop had been way over-shorted by Wall Street. In fact, there were more short positions than there were actual shares, with 140 percent of Gamestops shares sold short in mid-January. If the WSB traders could cause the price to rise, that would in turn cause the short sellers to try to buy shares in order to mitigate losses. But if there aren’t enough shares to go around, as was the case with Gamestop, the limited supply and massive demand would cause the stock price to skyrocket. This is known as a “short squeeze.” 

What WSB pulled off was one of the greatest, and perhaps the most bizarre, short squeezes in history. Such squeezes have happened before (for example, Volkswagen briefly became the most highly valued company in the world in a 2008 short squeeze) but usually they were done by large Wall Street institutions, not people on the internet. 

Thanks to WSB’s short squeeze, the stock price of Gamestop jumped from less than $20 in the beginning of January to nearly $470 by January 28. 

The effect simultaneously made many investors rich while seriously hurting the hedge funds that had shorted Gamestop. One Redditor who goes by the username DeepFuckingValue, who had been buying Gamestop shares since 2019, made tens of millions of dollars. Some Redditors were able to pay off student loans with the profits they made off Gamestop. Meanwhile, the short sellers had lost nearly $13 billion as of Monday. 

WSB’s market shenanigans worked due to several factors that created a perfect storm. First, Gamestop is a company with a lot of name recognition, as anyone who played video games in the 2000s probably frequented their local Gamestop. There is considerable overlap between gamers and the WSB community, and many gamers-turned-investors were likely driven by a sense of nostalgia for the video game retailer.

Second, anger at Wall Street had been brewing ever since the 2008 financial crisis, when big financial institutions made massive profits at the expense of the little guy. For some, the Gamestop short squeeze was as much about fighting back against hedge funds as it was about making money.

Furthermore, apps like Robinhood had made it easier for normal people to trade than ever. The drop in consumer spending that resulted from the pandemic also meant that people had more money to invest. This created the perfect conditions for a popular movement to make waves in the market. 

Finally, like so many things on the internet, the short squeeze simply went viral. Memes flooded the internet, telling the public to send the price “to the moon” and making comparisons to the film The Wolf of Wall Street. Elon Musk tweeted out a link to WSB with the caption “gamestonk!”  

The craze spread beyond Gamestop. WSB also started driving up the price of companies that had also been bet against, like AMC and Blackberry. AMC, a theater chain that has been hammered by COVID-19, saw its stock rise 274 percent in one day.   

Robinhood, the app that many amateur investors had been using to trade, prevented its users from buying stock in Gamestop and other companies that had been subject to WSB machinations (users could still sell though). Other brokerages followed suit. This move prompted major backlash, with politicians from both sides of the aisle criticizing Robinhood’s decision. Rep. Alexandria Ocasio-Cortez called Robinhood’s actions “unacceptable” on Twitter, to which Sen. Ted Cruz replied “fully agree,” although AOC was uninterested in working with someone who had just helped incite a deadly insurrection. 

Gamestop’s surge was never meant to last forever and it appears that the party is over. At the time of this writing, the Gamestop’s price has dropped precipitously. As fun as it is to watch a bunch of Redditors beat Wall Street, a lot of normal people are likely losing a lot of money as not everyone jumped on the bandwagon soon enough. Worse, those who are new to the stock market might invest more than they can afford to lose. If you haven’t bought Gamestop shares yet, it’s probably best to steer clear.

This bizarre saga has shown how easily the market can be manipulated. New regulations will likely be created and Reddit may end up forcing the federal government to do what should have been done years ago. That said, public policy takes a long time to formulate so don’t be surprised if you see the internet beat the market again before the government can step in.

Photo: Keith C / Wikimedia Commons

Washington Correspondent | + posts

William serves as the Washington Correspondent for the Texas Signal, where he primarily writes about Congress and other federal issues that affect Texas. A graduate of Colorado College, William has worked on Democratic campaigns in Texas, Colorado, and North Carolina. He is an internet meme expert.

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