So what is that “crazy battle”? Why does it attract so much attention? Here is the basic information you need to know.
This is not a war between heroes and monsters, not between good guys and bad guys. On one side is a group of traders, mostly young people, working together on Reddit to boost stock prices of struggling companies, including GameStop (GME), BlackBerry (BB ), Macy’s (M), and AMC (AMC).
This is also known as a war between hedge fund holders and short-sellers who betting on a company’s stock to collapse. It is often the elite part of Wall Street, who are watched by millions of people to make informed decisions to boost their investment portfolios or starting a business. But they’re detested by many Millennials and Gen Zers for creating a house-of-cards financial system that led to the 2008 crisis.
Why it is GameStop?
For young people in America, GameStop stores are what has been associated with their childhood. Many people have spent their youth lining up to buy their first consoles at GameStop, as well as buy and resell video games.
However, in the era of online stores, GameStop gradually lost its position as the big man and had to stay out of the game against Steam or Epic because gamers no longer need to go to the mall to buy games or controllers.
The company has been losing money continuously for many years and is forecast to be unprofitable until 2023, reaching the bottom of $ 300 million on the stock market in August 2019.
At that time, stock experts had predicted the very close death of GameStop on the exchange. This means that there is an opportunity for the speculators to jump in to make a profit by short-selling investment.
The influence from Robinhood
The rise of free apps like Robinhood has influenced the way investors trade in stocks, especially for those who starting a business. Previously, transactions were done manually and took a long time. However, Robinhood, a start-up stockbroker, has brought about a big change in stock trading. The company has sought to break through the highly rigid brokerage industry by making the investment become easy, enjoyable, and cheaper.
This application allows an investor to buy a fraction of a stock. Last week, the company launched an app-based fractional shares investment to lower the barrier to low-capital investors. This feature allows users to invest in leading technology companies like Amazon (currently over $ 1,700 / share) for just $ 1.
You could pay an analyst to tell you what stocks to buy, or you could create a Reddit account and follow forums like WallStreetBets. Millions of young people are opting for the latter, which is partly why the sudden surges in GameStop and AMC have caught Wall Street veterans by surprise.
Before this year, GameStop was a very strong short-sold stock that became the “money printer” for short-sellers, who borrowed and sold more shares than the company issued. Hedge funds won so much that they didn’t care about the risks they were creating.
Short-seller is a fairly simple concept — an investor borrows a stock, sells the stock, and then buys the stock back to return it to the lender. Short sellers are betting that the stock they sell will drop in price. If they win the bet, they sold high and bought low, and they walk away with money in the bank. If they lose the bet, that’s called a short-squeeze, and they often hedge their losses by buying more shares of the company they bet against.
In the case of GameStop and other stocks targeted by WSB, traders keep buying options, forcing the investors selling those options to hedge their bets by buying up GameStop stock.
As GameStop’s shares and returns have plunged over the years, a topic of discussion suggested that its critics were underestimating the financial capacity of the retail investor.
Before that, a user “DeepF —– gValue” appeared and showed off his profit when buying GameStop shares. DeepF —– gValue became the first person to prove that money can make money by investing in a stock that has been rated by Wall Street experts as “nobody wants to buy.”
However, this view could not convince Reddit investors, as stocks continued to decline. GameStop shares fell 15% in early 2018, losing 12% in May, and falling further by 28% and 27% in June and July.
However, there were two factors that formed the basis for the current event.
The first was entrepreneur Michael Burry, who said he bought GameStop shares through his Scion Asset Management investment fund. Then a joke came to an idea, turned into a blueprint for a “short squeeze” from WSB’s F0 team. They asked: Can GameStop reverse the sharp decline thanks to the WSB team?
It can be described like this: some short-sellers believe that a certain stock will fall. So they will borrow this stock from other investors and sell it – they intend to buy it back when the price falls as intended to return the stock to the original owner.
The problem with short-selling, however, is that one person’s loss can lead to a chain reaction to others. If a stock begins to rise sharply, some short sellers will have to give up their intention to short and buy back the stock at a higher price to pay it back. This further pushed the stock prices higher, burning the pockets of other short-sellers who still had their shares, forcing them to buy back even higher prices to cover losses.
At that time, the argument of value trading and the idea of forming an informal “cooperative” to buy shares were combined, thereby making GameStop a potential market, also an opportunity. Then the Wall Street battle broke out.
The first “hit” didn’t take too long. GameStop shares were up 22% on the day Senior_Hedgehog posted on the pre-sale. The next day, GameStop continued to grow 26%, while at times the volume of transactions was 5 times higher than the 20-day average.
That was followed by another impressive rally when Chewy Inc. co-founder Ryan Cohen revealed a 5.8 million stake in GameStop through RC Ventures on August 31. Accordingly, the company’s shares rose 24% that day. Cohen’s announcement is the key.
As GameStop began to steadily increase in the last 4 months of 2020, more and more users joined the WSB team. As part of the “welcome party”, they were reminded of the rule: never sell, never give up.
Even billionaire Elon Musk has jumped into this war. After GameStop closed the market for more than $ 200 – 10 times what some short-sellers had previously forecast – Elon Musk tweeted briefly: “Gamestonk !!” – Praise to the Reddit team that blew the price of a share to its highest ever.
And yet, that team recently spread Musk’s tweets with the promise that if GameStop’s stock reached $ 1,000, he would attach the company’s logo to his rocket and launch it into space.
This made the Reddit team shouting to each other to push GameStock’s stock price even higher at “rocket speed” to see if they could make the billionaire Elon Musk’s promise come true.
Tech investor Chamath Palihapitiya dipped his toe in the frenzy, buying call options on Tuesday but closing his position Wednesday, he told CNBC. Palihapitiya said he would donate his profits to charity and defended the retail-investing phenomenon playing out on Reddit.
“Instead of having ‘idea dinners’ or quiet whispered conversations amongst hedge funds in the Hamptons, these kids have the courage to do it transparently in a forum,” he said. “What it proves is this retail [investor] phenomenon is here to stay.”
Social media dominance?
While the battle is exciting, in fact, both GameStop and AMC are companies that are struggling to do business. Their actual value is not worthy of what they are now, even blown up by a hundred times.
Despite the argument that GameStop is currently undervalued, not many investors believe that GameStop, BlackBerry, Macy’s, and AMC actually have activities that help support such soaring stock prices.
When this wave of support ends, holders of GameStop or AMC shares will see their account values evaporate. More seriously, it will create panic, that is sell without anyone buying. And a new wave will engulf both of these companies.
“This is unnatural, crazy, and dangerous,” said Michael Burry, a longtime investor at GameStop.
“The current situation is just a postmodern financial play that’s completely untrue. Nothing has changed for the company,” said Joost van Dreunen, a lecturer at New York University’s Stern School of Business. “In any case, if anything, the fourth quarter report could be a bit disappointing.”
So, for the online community around the world, the GameStop event is an interesting one. Maybe you will be happy when Wall Street investors who hold hundreds of billions of dollars, defeated by the young people seem to understand nothing about finance.
But for Wall Street investors, it’s the indication of how social networks can dominate our lives. Just like how Twitter can change the world of news and politics, how YouTube and Instagram can change the fashion and entertainment industries. And now, Reddit forums dominate the financial world.
Many have compared GameStop to a battle between new students and old students, between amateurs and professionals, between rebels and veterans.
Currently, young people are winning. But people still worry. It’s no different than a bubble just waiting to explode.