Feb 5, 2021 | OPINION | By Ian Chalmers | Illustration by Jubilee Rivera-Hernandez
“Dump and Pump!” “Hold!” “GME and AMC to the Moon!”
These are just a few of the slogans that keep churning out from r/WallStreetBets on Reddit. Last week saw an explosion of the GameStop stock price, which soared from $80 last Monday to a high of nearly $500 on Wednesday. Why so much energy into a stock only priced around $15 back in mid-December?
Essentially, Redditors saw that GME stock was being shorted, overtly so. Some Redditors claimed that the short for GME was ranging from 102% to 140%. What is a short? TLDR News U.S. used an analogy of an apple to explain shorting. Say that the price of an apple is $1. The person shorting it (Firm A) is borrowing the apple, expecting the apple price to decrease. If the price of apples does decrease, say, to $0.50, then Firm A can buy the apple for $0.50, return it to the seller they bought the apple from, and profit $0.50. Now if Firm A borrows the apple when it is priced at $1, then a group of people buy all the apples, limiting the supply of apples, the demand will go up, leading to an increase in price. Say the price increases to $5 an apple. Firm A would still then need to return the apple to the seller, and at this point the Firm A is making a loss of $4 (they sold the apple for $1 before the price unexpectedly rose). Now replace the apples with stocks and imagine the picture on a more massive scale.
The over-saturation of shorts in GME has led to the stock being shorted to the point where there are more shorts than stock. Some brilliant Redditors figured out that if they could get retail investors (ordinary people) to buy up an overwhelming majority of the stock, then they could perform what is called a “short squeeze.” In this scenario, the hedge funds would need to buy the stocks back as obligated in their contract, since demand is high (and supply is low). After successfully mobilizing individuals to buy the majority of GME, r/WallStreetBets realized that they can hold on to them and force the price up as hedge funds get desperate to try to buy the stock as low as they can to cover their contract. That is how a stock went from a 52-week low of $2.57 all the way to $483.
The media caught on, and soon r/WallStreetBets saw a growth in new members. Last Thursday, the community became private as popular trading apps such as Robinhood prevented retail investors from buying certain stocks, most notably GME, AMC, BB (Blackberry), and NOK (Nokia). People were outraged, some taking to Twitter to voice their concerns about supposed corruption. Some law firms are even in the process of filing class action lawsuits against the trading platform Robinhood. $40 million of Robinhood’s $90 million annual revenue comes from Citadel, which owns Melvin Capital, a hedge fund that has much to lose if the price of GME goes up. We even had Ted Cruz agreeing with Alexandria Ocasio-Cortez on the Robinhood situation, calling for congressional hearings over what is believed to be market manipulation.
While these stock prices have gone down, some people jumped ship temporarily and put their money into Dogecoin. The cryptocurrency, which started out as a meme, started out last Thursday with around $0.007 per share and rose to around $0.081, increasing by about 700%. Even as the stock prices of these highly volatile, and shorted, stocks went down, billionaire Mark Cuban, one of the investors on “Shark Tank”, held an AMA (Ask the Mods Anything) on r/WallStreetBets. He told them that even as the stock prices go down for these stocks, investors should hold them. And holding them they are, comparing those who panic sell to having “paper hands” and those who have been holding through the thick of things to having “Diamond Hands.”
Who would have ever thought that the first month after such a hectic year would be even more hectic? First Wednesday of the year the Capitol Insurrection, second Wednesday impeachment, third Wednesday the inauguration of President Biden, and last Wednesday the rise and domination of GME in the news and social media. Likewise, no one would have ever thought that Ted Cruz and AOC would ever agree on anything, and yet here we are. Hope y’all strap yourselves in, because the way things are going so far, this will be a crazy year.