By Seth Gellman and Cian Colgan
Source: medium.com
https://medium.com/pcmag-access/what-is-going-on-with-gamestop-meme-stocks-explained-fdff7151c3ff
Many have debated the effect of social media platforms on the stock market for years. One subreddit, WallStreetBets, known as a forum for many to discuss stock options and their gains/losses in a more lighthearted tone, has become central in a movement that is rocking Wall Street.
Let’s get some background here: GameStop’s ($GME) share prices have been dropping steadily since 2016. The retailer, whose annual revenue has only decreased since 2016, was being shorted by hedge funds like Melvin Capital. What shorting means is that they have decided to take a loan out on GameStop stock, and then immediately sold it. By doing so, they’re taking a risk that the share price is going to drop dramatically. Assuming the share price drops like they anticipate, they buy back the stock to repay the loan and keep the difference. Some smaller investors, namely those at WallStreetBets, saw what was going on and took advantage of it. They bought a bunch of shares of GameStop themselves, driving the share price up dramatically, causing some of the hedge funds to pull their shorts out, increasing the price even more. The latter part of that is called a “Short Squeeze”, and it’s generally done by hedge funds to cut their losses.
Over the summer, the price for one share of GameStop was about $4. As of today, January 30, that number has skyrocketed to $325. All in all, it’s clear that GameStop’s share price is massively inflated, and it will drop at some point. However, when it will drop is still a mystery.
While hedge funds like Melvin Capital and Point72 Asset Management have been panicking over lost profits, some billionaires have actually been investing in the new movement. Tesla CEO Elon Musk has tweeted his support for the movement. Other billionaires, like Social Capital CEO Chamath Palihapitiya and tech entrepreneur Justin Sun have also invested in GameStop.
Another important player in this game is Robinhood, a financial service company and regulated broker-dealer, has been at the heart of some controversy. Robinhood is an app that gained much of its popularity by making investing much easier and more streamlined. The controversy comes from their decision to restrict investors’ ability to buy GameStop stocks, as well as other stocks that were in the same boat, like $AMC and $BB. As a result of this, the share price for GameStop dropped to $132.00 at 11:30 AM on Thursday, from a high of $469.42 at 10:00 AM the same day. A class action lawsuit has sprung up as a direct result. Interestingly, this isn’t their first time being in the legal headlights, as on December 17, 2020 they were charged by the U.S. Securities and Exchange Commission for “misleading customers about revenue sources and failing to satisfy duty of best execution”. For this, Robinhood ended up making a settlement of 65 million dollars.
One Reddit user, Keith Gill, invested $53,000 into GameStop in June 2019, when share prices were roughly $5. Many thought this was crazy, and said as such. Gill, however, continued to hold firm. Others eventually joined him, and the value of his investment skyrocketed. As of his most recent Reddit post, he shows a screenshot of his investments valued at 46 million dollars, a mind boggling return for $53,000.
On January 27, Discord, a messaging and voice chat software, banned the official WallStreetBets server, citing “hateful and discriminatory content” as the reason. Not all is lost, though, as a new server was created soon after, and Discord is actively working with that server’s moderation team to keep things under control, as well as help manage the problems that can arise with sudden massive community growth. In a similar, though much more intense vein, the subreddit itself is also under observation by the U.S. Securities and Exchange Commission, the federal agency responsible for protecting the national banking system and stock market investors.
How events will play out in the long run is yet to be seen. The hedge fund billionaires are furious, such as Leon Cooperman, who went on CNBC to say that this was an “attack on the wealthy.” How the market will continue to respond and how long people will try to hold GameStop will be interesting to watch in the future.
