Game Stop has become a hot topic in the past week. Not for EB-style sales, but for being the battleground for a David versus Goliath financial showdown.
UPDATE: As this piece was being written, the WallStreetBets subreddit closed itself off to unapproved users. They’ve been inundated with people trying to crash the system and scare potential buyers off. There’s a few links in the article you may be unable to access until the sub opens up again. Discord has closed the WSB server. Clocked has reached out to the moderators of WallStreetBets without a reply.
If you’re wondering why you’re suddenly seeing GameStop stock (GME) everywhere, never fear, we’re here to give you the rundown on what’s been an absolutely insane few days.
First and foremost, we at Clocked are not financial advisors, so nothing you read here should be taken as gospel for your future money moves. What we are is joyous spectators in the downfall of a group of
greedy arseholes hedge funds.
The nitty gritty is that GameStop (America’s EB Games) has for the past few years been fading out of financial solvency. Brick and mortar stores just have no way of competing with the digital download scene – especially in a pandemic environment. Seeing this, some big dogs (woof woof) from Wall Street saw a chance to capitalise on the downfall of an icon.
The Big Ten-educated, silver spoon trust fund children at Melvin Capital took out billions of dollars in ‘shorts’ against the value of GME. What happened next was something they didn’t expect.
Shorting stock is a process where you make money if a stock loses value, the idea being that you borrow a number of stock from an exchange at a specific cost, then immediately sell them. For example: you ‘short’ GME for 1000 stocks at $4 a pop. You immediately have $4000, but you owe the exchange 1000 GME stocks. As the value sinks, the cost of buying those stocks reduces and you keep the difference in value. So, if GME drops to $2 you can buy 1000 stocks for $2000 and keep the $2000 for yourself. For ever.
If the price goes up, then you owe the exchange the difference. Exchanges really don’t like IOUs, so an initial payment into the stocks acts as collateral. For the previously mentioned $4000 you could be expected to put up $400 of your own cash. If the stocks went up in value, say from $4 to $4.40, then the 1000 GME stocks become worth $4400. To stop the exchange ever losing money, it liquidates (takes) all $4000 of your ‘position’ ($4) from the borrowed stock, plus the $400 you put in.
This is what the fratfuc softbois at Melvin Capital were hoping to do. They expected the value to drop, and were hoping to feed, like vultures, on the corpse of GME. It’s impossible as an Australian armchair investigator to know the exact amount of stock they held, but it can be reliably guessed that they were sitting on at least $4 billion in GME stocks.
Anyways, Tax the Rich
— Alexandria Ocasio-Cortez (@AOC) January 27, 2021
And this is where the magic starts. Back in October a group of clever Trevors from Reddit’s r/WallStreetBets subreddit called out Melvin Capital and planned their downfall. They had noticed that Melvin Capital had this mammoth short on GME, and wanted to force a liquidation of huge proportions.
When stocks are bought, the value of stock increases, and if enough people bought into GME then the price would raise, causing Melvin Capital to have to sell off their stock at a loss, or buy back into GME with the hopes of prices eventually dropping.
This is where we see a group of plucky Davids taking on the Goliath Melvin Capital. Retail (personal) investors traditionally have no power in the market – they aren’t rich enough to make big impacts with their moves. But suddenly, as a unified force, the Redditors of WallStreetBets were able to band together and push the price up, and up, and up. Through thousands of people buying stocks by the handful, GME went from $10 in October to $30 at the start of January.
It had taken months, but Melvin Capital was finally at the point of liquidation. Here, they called in some help. Rich white man called rich white man and his friend. Two hedge funds (Citadel and Point 72 Capital Management) bailed Melvin Capital out to the tune of $2.75 billion. This pushed the stock to make a giant leap upwards, from $40 on the 21st of Jan to $150 on the 25th.
So far, so standard. This is an anomaly, but hadn’t caused the frenzy that we’re seeing over it now. The next big move was Elon Musk sowing his standard brand of chaos with a one-word tweet.
— Elon Musk (@elonmusk) January 26, 2021
As Musk is the adopted granddaddy of ‘making it’, Reddit went fucking wild. Prices for GME went from $150 to the $350. This obliterated the position of the three financial giants and now they’re left, dick in hand, rocks in socks, with nothing to show for their time.
What makes this an exceptional moment has been the refusal of the vast majority of Redditors to cash out. They’re holding onto stock with the hope of pushing the price higher and higher on a purely speculative basis. As is expressed on multiple posts, this is no longer all about making money, but instead about taking control in a system that has been manipulated time and again by big financial players.
Those same big financial players are now stepping in trying to claim that WallStreetBets has been unfair in the way it acted. After the hyper-affluent lose for the first time, they don’t want to do it again. There are pushes from the financial sector to investigate the goings on of WallStreetBets to prevent this happening again.
In a glorious fuck you to these arguments, Chamath Palihapitiya (the voice of wealthy reason) went onto CNBC to roast their anchor. The push from conservative media outlets has been that the shenanigans around GME are bad for the economy, which proves yet again that ‘economy’ and ‘rich man’s yacht money’ are interchangeable 80% of the time.
This situation is red hot at the time of writing, and we don’t yet have the full outcome. What we do know is that there is no sustainability to GME’s value in real-world terms. The company just has nowhere near enough earning power to support the sky-high value of its stocks, and it’s entirely reasonable to expect a crash at some point.
But before then, here’s hoping the ballsy theydies and gentlethem from WallStreetBets get away with the most glorious financial heist of recent memory. A genuine Robin Hood moment of taking from one or two of the rich, and giving to thousands of the poor.
If governments won’t tax the rich, then Reddit plans to eat them. I’m all for it.