GameStop: How Technology Upended Finance
GameStop became the latest viral talking point of 2021 this week. The company’s stock, which had fluctuated between $5 and $17 in 2020, reached an all-time high of $469 on Thursday. The reason? A massive campaign to pump the stock by a Reddit group called “Wall Street Bets”.
Wall Street Bets (WSB) is largely comprised of small-scale retail investors who place massive “yolo” bets on stocks they think will boom. Some users have lost their entire life savings when placing such bets, while others have made millions. The forum is filled with young investors, memes, and stock plays. Collectively, the WSB forum epitomizes two things — making wild bets and beating Wall Street at their own game. This week, they did both.
Earlier this month, GameStop was contemplating bankruptcy. Covid had decimated their sales and in-person business model. With an uncertain future and failing strategy, GameStock decided to close stores and digitalize their products at discounted prices. While the company attempted to stay afloat, Wall Street took aim.
Hedge funds such as Melvin Capital, Point72, and Citadel saw GameStop’s potential bankruptcy as an opportunity and increased their purchases of short positions on the stock. “Shorting” allows firms to make money if the price of a company’s stock falls. However, if the price rises when their positions expire, firms are forced to cover their positions by buying the stock back at a higher price. In the case of GameStop, hedge funds were so confident in their short positions that they leveraged their shorts with money they did not have.
Wall Street Bets soon caught wind of Wall Street’s irresponsible gamble and decided to do the unfathomable — bet against the hedge funds and pump GameStop’s stock. This is called “squeezing a short”. If the forum pumped the share price enough, the hedge funds would be forced to purchase shares and increase the stock price. WSB members realized this and began purchasing GameStop shares and call options (betting on the stock price to rise) in swarms.
Within two weeks, the WSB forum has grown by 4+ million members, the stock price of GameStop has risen over 1,400%, and hedge funds have lost an estimated $5.5 billion. Although GameStop’s stock price does not reflect the company’s value, it does expose the vulnerability of hedge funds shorting a sinking company.
A collective group of “yolo” investors ransacking a hedge fund has certainly never happened before. GameStop’s surge and the success of WSB exemplifies the power of ICTs. It has never been easier to create, share, and access information. It proves that the internet is capable of dismantling institutional players. It reemphasizes the potential of social constructs in tech.
Ultimately, David beat Goliath. WSB beat Wall Street. The GameStop phenomenon has led many to question how institutions communicate. If colluding hedge fund managers can talk business over dinner, what’s stopping the everyday person from starting a financial revolution on reddit? Although the GameStop frenzy is far from over, WSB aims to uphold the principle that brought the forum such success in the first place: staying stupid longer than the hedge funds can remain solvent.
