You’ve heard about the “Reddit Kids” on /r/WallStreetBets that are sending #GameStonk to the moon but you have no clue what that means. You want to know what it means. And if you don’t, you should. So here we go.
How it all started
Remember the Occupy Wall Street movement that used boots on the ground to protest greed, corruption, and unfair financial practices that led to the 2008 collapse of the US economy and subsequent bail out of the financial institutions?
Newspaper headlines can’t capture the raw pain, suffering and frustration felt by many American families at the time. But this thread on /r/WallStreetBets does it quite well:
I was in my early teens during the ’08 crisis. I vividly remember the enormous repercussions that the reckless actions by those on Wall Street had in my personal life, and the lives of those close to me. I was fortunate – my parents were prudent and a little paranoid, and they had some food storage saved up. When that crisis hit our family, we were able to keep our little house, but we lived off of pancake mix, and powdered milk, and beans and rice for a year. Ever since then, my parents have kept a food storage, and they keep it updated and fresh.
Those close to me, my friends and extended family, were not nearly as fortunate. My aunt moved in with us and paid what little rent she could to my family while she tried to find any sort of work. Do you know what tomato soup made out of school cafeteria ketchup packets taste like? My friends got to find out.– /u/ssauronn
Meanwhile, Wall Street executives whose illegal and irresponsible decisions caused the crash faced no repercussions. Instead, they enjoyed free money from government bailouts and learned not a single lesson.
That sentiment has spent a decade on the back burner. It’s been in quarantine for a year. Now confronted with the economic devastation of COVID, where the rich are getting magnitudes richer and the poor are getting stimulus checks, the pot is finally boiling over.
Why GameStop and… How?
Rewind 4 months ago, when Reddit user Player896 posted a thread titled “Bankrupting Institutional Investors for Dummies, ft GameStop“.
It’s a remarkable piece of due diligence that carefully crafts the argument for GameStop’s eventual rise, despite the company’s teetering position on the brink of bankruptcy.
The prospects of a brick and mortar video game store in a digital download era may seem bleak, but a new round of Next Gen consoles, revised online strategy, and refreshed leadership team provided promise.
But that’s not the real story here. It’s the shorts.
The Unprecedented Short-Selling of GameStop
The act of short-selling is basically betting against a stock. When that happens, you don’t even need to buy the stock, you just place a bet that it will go down.
Four months ago, GameStop’s “short float” was 120%, which means that 120% of the company’s outstanding shares were being shorted.
How is that even possible? It shouldn’t be: it’s called “Naked Shorting” and it’s been illegal since the 2008 financial crisis. But who cares about laws when you’re part of a corporate machine and the government has proven it will bail you out and let you off the hook?
The answer is savvy Redditors who spotted an opportunity to stick it to the man to the degree of billions of dollars.
To exit a short-selling position you need to eventually buy the stock that you borrowed, either willingly or by force. If you need to buy more stock than exists (120%) it puts you in a tricky spot. And if the stock price has gone up instead of down, you’ll be forced to pay more than you borrowed, leading to potentially infinite losses.
That’s simplifying the economics by many magnitudes, but in short (pun intended), /r/wallstreetbets created a financial weapon of mass destruction by beating short-sellers at their own game.
Many retail investors (everyday people) dislike the concept of institutional short-sellers, suggesting the practice is anti-American. They can bet big money that a company will fail, manipulate the public to believe them, root against the company’s success, and profit from their misfortune.
Institutional short-sellers piled into GameStop and bet historic quantities that they’d fail… but then the unthinkable happened: people started buying the stock in unprecedented amounts, sending the stock-price skyrocketing.
HOLD TO THE MOON!!!!!!!!!!!!!
GameStop’s stock has rallied 1600%+ year to date and 450%+ this week alone, literally turning some amateur investors into millionaires in the process.
If you’ve stuck your nose into the subreddit where all this occurred, you’ve likely seen people insist on holding GameStop stock until it reaches the moon.
You may think a 1600% gain is a meteoric enough rise, why not cash out?Holding is a critical part of the collective strategy to screw over the much-hated hedge funds and make a small fortune in the process.
At the end of the day, someone is always left holding the bag, and the longer people hold, the better the chance that hedge funds (rather than retail investors) are the biggest losers.
If too many people sell for small profits it will drive the price down, make more stocks available to short-sellers, and allow them to affordably “cover” the stocks they borrowed to place their bets.
Take from the rich, give to the poor
It’s no coincidence that the stock market app supporting much of this trading frenzy is named Robinhood, after the heroic outlaw known for taking from the rich and giving to the poor. The app represents an opportunity for everyday people to purchase stocks in small amounts, without fees, leveling the playing field between institutions and individuals.
It’s a beautiful, beautiful irony, but let’s get one thing clear: nobody is stealing from the rich in this case.
The story of GameStop is about the underdogs (legally) winning for once. Billion dollar corporations have used these same tactics, coupled with computer programs and algorithms, to manipulate, squash, and squeeze every dollar out of the little guy for decades.
Finally the little guy spots ONE legal opportunity to beat a system stacked against them, executes flawlessly, and what happens? The mainstream media and talking corporate heads cry foul.
Luckily there are plenty of people helping the world see through the BS, including Charles Payne:
Where does it end?
The GameStop saga is far from over and the underlying story has already spilled over into other heavily-shorted stocks that present similar opportunities. Redditors, however, may suggest caution: the GameStop victory was largely due to power in numbers- a competitive advantage quickly lost when split across many different interests.
This is personal for the millions and millions of Americans who got the raw end of the deal. GameStop represents an opportunity to beat the negligent and narcissistic insider-elite at their own game — fairly and legally — through the use of strategic thinking, power in numbers, and collective resilience to “hold to the moon”.
The issue has now escalated to the White House and huge companies like TD Ameritrade and Schwab have restricted trading of GameStop, “In the interest of mitigating risk for our company and clients”.
Believe it or not, Robinhood followed suit shorty thereafter. “Free market my ass.”
This has further infuriated the everyman, who at each turn sees the preferential treatment given to Wall Street billionaires and wonders how many stimulus checks their insider access earns them.
The truth is that nobody knows where the GameStop saga will end, but at this rate, it won’t end at all. It will simply change and morph as retail investors pool together their resources to find new and innovative ways to defeat the evil empire.
As El Presidente of Barstool Sports so wisely explains, “You can’t stop the internet. You can’t beat the internet. It’s like fuckin’ Michael Scott- you shut down Michael Scott paper company he’s got a million different fuckin’ names.”
Call them Reddit kids.
Call them dumb millennials.
Call them whatever you want.
The truth is that they’re a smart-as-hell group of quick-thinking, fast-moving, internet savvy ass-kickers that beat the institution at their own game.
You can join them at /r/wallstreetbets or follow them on twitter @wsbmod.