Gamestonk – Can you still make money with it?

The expression “GameStonk” refers to the bizarre phenomenon that happened early this year as online Reddit investors (r/wallstreetbets-WSB) beat Wall Street’s hedge funds and institutional investors by forcing them to buy GameStop shared to mitigate their losses.

The term “Stonks” is commonly used jargon on social media platforms for widely-held stocks and shares.

While Wall Street lost billions, several smaller investors made huge profits at the hedge funds’ expenses.

Whereas the subreddit r/wallstreetbets (WSB) event was highly fascinating to watch and analyze, many experts think it is unlikely the phenomenon will happen soon again. But is that true?

Were the actions impulsive or rational? Have Wall Street hedge funds learned their lessons? Can you still make money with it? Let’s first see what happened to GameStop’s shares.

The online WSB stock-investing group’s GameStop battle against Wall Street’s institutional short-sellers had resulted in an eye-popping 750 percent rally as a number of retail traders grabbed this extraordinary opportunity to turn the tables and make some decent money off an institutional investors’ short squeeze operation.

So let’s take a closer look at what happened with GameStop. You don’t need to be a stock market expert to understand that something was extraordinary with GameStop.

In the past few years, we’ve hardly seen a more bizarre financial story. The fact of the matter is that GameStop’s stock price shot up by almost 2,900 percent while the company was failing!

A few daring but determined Redditors became filthy rich overnight while a number of hedge funds had lost billions of dollars. So let’s take a closer look at this story of GameStop or GameStonk.

GameStop, a brick-and-mortar video game retailer from Grapevine, Texas, went through difficult times as video game sales, also before the pandemic hit us hard, were shifting online.

Lots of folks that regularly play video games hadn’t seen the inside of a GameStop shop for several years. The only reason they might have visited a GameStop store was that some video game wasn’t available for downloading yet.

Doe to GameStop’s bad position, lots of Wall Street folks were circling the company like sharks in the water smelling blood. Hedge funds started to short-sell Gamestop stock, so they were actually betting against it.

When short-selling a stock, you actually borrow shares to sell them at current prices. Then, at a later date, you buy shares to replace those borrowed shares. If the price of those shares has up, you lose. When the price has gone down, you profit.

So there’s the risk of losing money if the price of the shares goes up. You can actually lose big money by doing that. But it all looked like Gamestop would go the same way as Blockbuster did, so most hedge funds were pretty confident and shorted GameStop heavily.

Reddit WSB Forum

Then, r/wallstreetbets (WSB) got active. WSB, a popular forum on the website Reddit, a “subreddit”, likes to refer to itself by the tagline “just like 4chan was finding a key Bloomberg terminal”. For those of you that have no idea of what 4chan is, that’s where QAnon originated from.

The WSB subreddit is a platform where many amateur investors are active. They use names for themselves like “degenerates” or “autists” that like to engage in risky or tricky “yolo” trades that aren’t exactly in line with conventional trades and wisdom.

WSB really seems like a somewhat strange mix of financial in-depth analysis and some edgy memes and the subreddit platform even comes with its own slang. When they refer, for example, to “stocks”, they use “stonks” and when referring to holding onto stocks, they use the phrase “diamond hands.”

At a certain moment, it became clear to people on the Reddit WSB forum, that Wall Street had over-shorted Gamestop way too far. The fact of the matter was that the short positions outnumbered the actual available GameStop shares by over 140% in mid-January.

Now, if WSB traders would be able to cause the GameStop share price to rise, the short sellers would, in turn, be urged to try to buy stock to mitigate their losses.

But what would happen if there weren’t enough shares available, as in this GameStop case? Well, the limited supply of shares and the simultaneous massive demand in GameStop shares would probably cause the price of shares to explode. This phenomenon is also referred to as “short squeeze.”

What the WSB investors pulled off in this case, was actually one of the most bizarre and greatest short squeezes we’ve ever seen. Short squeezes happened before, but this was unheard of.

Earlier short squeezes happened to, for instance, Volkswagen. The company became the world’s highest-valued company in 2008 after a short squeeze. The difference was, however, that it was caused by large Wall Street investment institutions, not by simply some folks on the internet.

Well, the fact of the matter is that thanks to the WSB subreddit platform, GameStop’s stock price skyrocketed from under $20 in early January to almost $470 by the end of that month.

The effect of this phenomenon was that simultaneously, several hedge funds that bet on short-selling GameStop, such as Maple Lane Capital and Gabe Plotkin’s Melvin Capital, were seriously hurt while many investors got very extremely rich in a short period of time. In the end, the hedge fund short sellers had lost almost 13 million dollars!

One Redditor (that’s what these WSB investors are called) who had been investing in Gamestop stock since 2019, was lucky enough to make millions of dollars while other Redditors could finally pay off their student loans thanks to their GameStop share profits.

Gamestonk – Key Factors

Now, what were the factors that made WSB investors’ actions work? There are multiple factors that caused this action to become a perfect storm.

1. First of all, GameStop’s name is very recognizable and known around the world. Anyone who’s ever played a video game in the 2000s is familiar with the name and many video players will have frequented ar local GameStop.

There’s also an important overlap between the WSB platform community and video gamers and a lot of these gamers invested some money in the company which had led to some nostalgia sentiment for GameStop.

2. Secondly, ever since the 2008 financial turmoil, there’s been a lot of anger and mistrust at Wall Street. The big financial institutions had made huge profits, mostly at the little guys’ expenses.

And for many of them, short squeezing GameStop was not only about making money. It also meant a chance to fight back against these financial institutions and hedge funds and make them pay this time around.

3. Furthermore, new technology and apps such as Robinhood had, in fact, made it so much easier for ordinary people to trade than in earlier days. The pandemic had caused consumer spending to drop enormously and this implied that many people were having more money for investment purposes.

This helped to create the almost perfect conditions to have a popular movement make some waves in the financial markets. Technology helped ordinary people to disrupt the market.

4. And finally, as with many phenomena on the internet, this GameStop short squeeze just went viral! Memes were flooding the internet. They told the audiences to send the GameStop share price “to the moon.” There even were comparisons to the movie “The Wolf of Wall Street” and when Elon Musk tweeted a WSB link with the caption “gamestonk!!” the whole world knew.

GameStop exploded after Elon Musk’s ‘Gamestonk’ tweet

When Elon Musk released his “Gamestonk!!” tweet in after-hours trading, the price of GameStop shares surged more than 150 percent higher the following day.

The well-known founder of Tesla had posted a link in his tweet to the subreddit WSB (WallStreetBets) which had become more and more popular for small investors that had piled into the soaring stock of GameStop.

More investors started to tweet excitedly about WallStreetBets’ most favorite stock. It all became so popular that the online stock-investing platform had almost 2.5 million members!

As said before, the expression “Stonks” is often used in investing banter and jargon on social media platforms for widely-held shares and stocks.

The online WSB stock-investing group’s GameStop battle against Wall Street’s institutional short-sellers had resulted in an eye-popping 750 percent rally as a number of retail traders grabbed this extraordinary opportunity to turn the tables and make some decent money off an institutional investors’ short squeeze operation.

Many analysts say that, while the r/wallstreetbets (WSB) phenomenon was a fascinating thing to watch, it is highly unlikely to have a happy ending for someone. Many criticized retail investor policies and behavior to target Wall Street shorts.

The Craze Spreads

The craze didn’t stop at GameStop. r/wallstreetbets (WSB) also started to drive up the stock price of companies hedge funds were betting against. For example, AMC, the well-known American theater chain that was hammered hard by the pandemic, saw its stock price go up almost 275 percent in just one single day and something similar happened to Blackberry.

Of course, Gamestop’s surge couldn’t last forever but in a way, it was fun to see some Redditors beat the Wall Street pros, but a lot of ordinary people also lost lots of money because not everybody had jumped on the GameStop bandwagon at the right time.

And what’s worse, people that were new to the financial and stock markets might actually have invested more money than they could afford to lose!

The bizarre GameStop phenomenon has clearly shown us how easy it is to manipulate the market. It is highly likely that new strict regulations will be created.

Reddit has actually forced the U.S. federal government to take actions that should have been taken many many years ago. That having said, however, we all know that changing policies will take some time so don’t be surprised if we witness another internet-based thrashing of the markets before government regulations have been implemented.

“Gamestonk” – Madness of Crowds?

Now, some analysts, like George Calhoun from Forbes, claim that phenomena such as “GameStop/Gamestonk” have nothing to do with the “Madness Of Crowds.”

The GameStop craze (or stock price eruption) has often been looked at as a result of extreme and irrational investor behavior. Charlie Munger called it a “speculative orgy”, a “frenzy”, a “game that was played by a bunch of losers who didn’t have a clue as to what they were doing”. Many look at this phenomenon as a classic and typical case of what’s called the “Madness of Crowds”.

I doubt if this view is correct. Observers are so easily misled by the fact that financial markets are not “rational” in a way that share prices are no longer reflecting a company’s underlying value of assets. The fact of the matter is that GameStop’s money-losing operations could not be 4000 percent more valuable at the time of the surge than the company was worth a year earlier, right?

But it also doesn’t mean that the decisions made by the r/wallstreetbets (WSB) traders are all irrational. In fact, this phenomenon was the result of a hyper-rational process.

This process was based on very accurate calculations of possible outcomes that are more certain than usual investment decisions. This has nothing to do with “Madness of Crowds.” It is a well-premeditated, predatory attack on a defenseless and cornered counterparty.

Forced Trading

The GameStop share price explosion made clear that the idea that all stock trades are entered into in a voluntary way (a phenomenon that would obviously be seen be true) is actually false.

We can see so many situations in which one party undertakes an action in trade involuntarily, under duress, and/or without any flexibility of execution.

This sort of situation may well be exploited (or initiated even) by traders that are at the transaction’s other side and who can benefit from the fact that the counterparty has little or no room for maneuvering.

And this is exactly what happened to the institutional hedge funds of Wall Street in the GameStop craze. They were forced to buy shares to limit their losses.

One example is a so-called “margin call.” An investor who has borrowed money to purchase stock finds himself forced into a position to sell. And that at precisely the wrong moment. So he sells at a loss if his share price has fallen below the collateral value.

So we are familiar with forced selling, but is there also something like forced buying?

Yes, there is! We’ve seen a number of situations in which a party had no (or hardly any) option but to actually buy shares, often at a hugely disadvantageous price.

Cornering and forcing these traders to buy and take losses is just one more example of how the world’s stock marketplace works. This phenomenon is one of the keys to understanding how the GameStop r/wallstreetbets (WSB) events happened and unfolded.

Last Updated on January 11, 2022.