GameStop Short Squeeze 2021: Battle Between Reddit and Hedge Funds

Price is What You Pay, Value is What You Get

Warren Buffett

GAMESTOP is a name that has shattered the mainstream financial market idea from 2020 to the present. Reddit users, a platform for online discussion, successfully turned the tables on Hedge Funds by using the same tactic against them. As a result, the financial giants were temporarily brought to their knees. In this blog, you will receive a full overview of what happened in 2020 with the GameStop stock price and how Short Selling became the ruiner of the conventional financial market concept.

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What is GameStop?

GameStop Corporation is a 1984-founded American retailer of video games, consumer electronics, and gaming products. The company is headquartered in Grapevine, Texas, and is the largest video game retailer worldwide. The world is becoming more digital, as is the gaming world, especially during the lockdown of April, 2020. Currently, GameStop has nearly 304.53 million shares available on the market.

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The Starting of the GameStop Short Squeeze

After the great manipulation by the bank that caused the great recession in 2008, the world suffered from financial depression for quite a long time. The Hedge Funds extracted extreme profits, and the rich got richer.

The strangeness returned when, during the 2020 lockdown, the entire world was losing their jobs, and big businesses like Walmart, Amazon, SpaceX, Microsoft, Meta, Oracle Corp., Berkshire Hathaway Inc., Alphabet Inc., and Google were thriving. The financial market began to boom. The rich were once again getting richer. The focus again went to the financial institutions.

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Keith Gill: Captain of the Reddit Army

Reddit is a combination of unlimited forums where people have conversations, ask questions, and discuss, and the restrictions are very limited. Jaime Rogozinski founded WallStreetBets, a Reddit forum, in 2012, establishing a large online community with a commanding presence in the world of finance. In 2019, WallStreetBets amassed over 800,000 subscribers and more than 3 million monthly unique visitors. 

Keith Gill was one of the WallStreetBets users. In 2019, Gill, an armchair investor, noticed something unusual about the stock market and began streaming on YouTube and posting on Reddit. He shared his whole journey with the YouTube viewers. 

Back in September 2020, GameStop had 65.5 million shares in stock, and 84% of them, or 55 million, were owned by the Short Sellers. 3.5 million shares are owned by Michael Burry himself. A new Hedge Fund war has just broken out right there.

The Hedge Funds were investing until GameStop was about to go bankrupt; at this time, Keith Gill invested $53K in GameStop in September 2020. Although many of their stores were being shut down, by looking at their 10-Q quarterly financial reports, they showed that they held a lot of cash and could pay off their debt and recover easily from the bankruptcy. 

Before diving deeper, let’s look at the

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SHORT SELLING:

As you know, in the stock market, you buy a share, and depending on how much demand there is for those shares, the prices go up or down. Generally, you hope to buy a share at a low price and sell it again when the price is higher, so you have made a profit.

Imagine a Scenario: 3 parties: Jim, Tom, and Henry. 
Jim has a vintage table. Tom borrows the table from Jim for $100 and promises 5% interest for a week. 
Tom rents the table to Henry for $100, as the market value is that, predicting the price will drop soon. 
One week later, the table’s price dropped to $70, so Tom bought the table from Henry for $70. 
Tom gives the vintage table back to Jim with 5% interest. 
Tom is left with $25, = Profit $25

People can also make money betting that a company’s share price is going to go down. This is known as “short stock,” and it was used on GameStop.

Now imagine a different Scenario: 3 parties: Jim, Tom, and Henry.  
Jim has a vintage table. Tom borrows the table from Jim for $100 and promises 5% interest for a week. 
Tom sells the table to Henry for $100, as the market value is that, predicting the price will drop soon. 
One week later, the table’s price rose to $130, so Tom bought the table from Henry for $130. 
Tom gives the vintage table back to Jim with 5% interest. 
Tom is out $35. = Loss $35

When prices fall short of expectations, as they did for Tom, thousands of people will buy back from Henry and return the vintage table to Jim. That’s how the market price of the ball will rise. This is called Short Squeeze, this was the doom of the Hedge Funds in January 2021.
Back in 2020, Hedge Funds worked together in the Short Sell, betting that the price would go down and making millions of dollars in the process.

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The Mistakes of Hedge Funds:

The biggest mistake that caused the downfall of this GameStop event was, the Hedge Funds were greedy. They could have brought the GameStop stock down from $100 and bought it back at $10, but they hung in there without selling. They were waiting for absolute bankruptcy. This allowed them to expose themselves. 

In September 2020, following Keith Gill’s lead, financial market analysts began exposing Hedge Fund tactics on GameStop. Example: Bankrupting Institutional Investors for Dummies, ft GameStop. The proof started blowing through Reddit, and hundreds of thousands were engaged during the lockdown. This time, each person had a small but significant amount of power to stop the Hedge Funds’ market manipulation.

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The Digital Protest: Reddit Army

The plan for the Reddit army is to keep buying the GameStop stocks and driving up the price (Short Squeeze), making the Hedge Funds lose more and more money; this will lead the Hedge Funds to buy more to return the investors’ money. Approximately 140% of GameStop’s shares had been sold short, and the rush to buy shares to replace those shorts as the price rose pushed it even further.

The masses were playing the banks’ and Hedge Funds’ own game against them. The propaganda began and spread through the US to buy and hold GameStop shares. 

By January 26th, 2021, GameStop had become the single most traded stock on the US Stock Exchange, surpassing combinations of the five largest tech giants. GameStop saw the share price go from $4 per share in 2020 to $490+ per share in 2021; from a $200 million value in April 2020 to a $28 billion value in 2021. 

People earned major money. Gill’s money grew from $53K to $48 million. And then the trade expert arrived and sensed a good profit opportunity. The Wall Street titans, Blackrock, and eight others made a combined $16 billion in just two days on GameStop, and Wall Street made huge money.

By the 28th of January 2021, the Hedge Funds and the short sellers had lost $70 billion, and 5,000 US firms were doomed.

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Drawbacks and Return of the Hedge Funds

The market started to drop in February, and people started to lose money. The reasons are, communication groups like Discord, Facebook, and Robinhood started to ban the retailers and the companies that allowed them to buy, blocking people from buying. The market manipulation began. Robinhood sold the user data to the Hedge Funds for $700 million. Again, when the market manipulation began, people started to lose money; Keith Gill had lost $14 million by February, 2021. 

This time retailers made a big mistake; they predicted that Hedge Funds may be coming back to invest again, creating volatility once again, but they were wrong. Then Hedge Funds started a new technique: Short Ladder Attack: The Hedge Funds sell Hundred share increments back and forth to each other in order to drop the price
People forgot the first rule of trading: Only Buy What You Are Willing To Lose

This is the very first instance of the intersection between social media and the financial system. This story shows how unpredictable and out of touch with reality the global financial industry can be these days. As a consequence of low-interest rates, stimulus, excessive financialization, and quantitative easing, the global economy has been transformed from a productive, imaginative, and earnings-focused husk to a rotting husk of speculation.

Michael Scott
Michael Scott

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