Reddit versus Wall Street: Explain it Like I’m Five
How Game Stock’s stock (GME) went up by 1600% in one day, and what it has to do with Reddit.
Wall Street treats the economy like a casino, making bets on what will win and lose. When they talk about a short sale, they are basically saying they have made a bet that the stock will go down. Hedge funds had bet big that Game Stop would go out of business. The hedge fund investors were using their bets to essentially drive down the stock and run Game Stop out of business. Selling it short to drive a failing stock lower and lower.
A subreddit of small-time/amateur investors (/r/WallStreetBets), didn’t like this and started buying it up. This made the big hedge fund investors lose their bets, because the stock was going up. When that happens, hedge fund/fat cats hedge their bets by betting the other way, which meant that both sides were buying the stock (essentially, a stock’s success can create a feedback loop which further helps its success).
This caused the GameStop stock to go up 1600% in one day!
That’s created a game of chicken between the rich hedge funds who are willing to hold onto their bets that the stock is of course going to drop again and the “little guys” at WallStreetBets who at this point are willing to buy the stock in part to stick it to the man. Who will cash out/give up first?
What is at risk?
How much money would you risk to stick it to the man?
The Redditor who arguably set off this whole thing, u/DeepFuckingValue, has over 50,000 shares of Gamestock.
In December when he was posting his investment on Reddit, GME was worth about $4. Then in January it went up to $14, and his commitment to keep holding was inspirational to other Redditors, who started buying in too.
By yesterday, GME stock was worth over $300 per share. This means as of January 27th, this dude’s initial investment is worth over 17 million dollars. So he, and all those redditors who got in on this early with him, could be filthy rich if they get out now…but if they get out now, the value of the stock will evaporate, and the rich guys who bet against the stock will have won.
Now the WallStreetBets amateur investors are in solidarity to keep holding the stock, even though it means they could lose all that money if/when the stock drops. Even if they can hold the stock until Friday, many of the short sales will expire, and the hedge funds will be forced to pay billions for their lost bets (that’s the “squeeze”).
But wait, there’s more! Wall Street fights back…
What does the Robinhood app have to do with the GME short sale?
Why WallStreetBets is calling Robinhood “The Sheriff of Nottingham”
There’s an app called RobinHood that made trades free and was seen as the way for the small investors to get involved in the stock market. It turns out one of their primary investors (Citadel) was financially entangled with one of those hedge funds who was getting hurt the most because of their many bets against this stock (Melvin Capital).
This morning, Robinhood made it so you can only sell, not buy GameStop stock! AND they removed Gamestop from search, so you can’t even find it. I put in a partial-share purchase last night, and it was cancelled this morning, so I can confirm this is true. (They also removed Nokia, AMC, and Blackberry, three other stocks involved in this.) As of this morning, those who had purchased GME are claiming that Robinhood is selling their shares without their consent.
Other trading companies are blocking sales of GME, and Redditors are scrambling to switch to a trading company that will still let them buy it. Overnight Robinhood went from everyone’s favorite investing app to now a one-star app. People are calling the SEC and reporting Robinhood for market manipulation. There will certainly be a class-action lawsuit against Robinhood. Investors in India, China, etc, are buying it up in support.
WallStreetBets, which is thoroughly apolitical, is saying stuff like: when Wall Street failed they got a buy out, but now that the little guys are winning Wall Street is picking sides to enforce who wins. They are saying stuff like that the “free market” is only free when ordinary folks get punished by bad investments, but that this is proof that when rich people lose billions, they are happy to step in and manipulate the “free market.”
It’s a David and Goliath situation, and one that involves real risks on both sides. The WallStreetBets users are sacrificing thousands (in some cases millions) of dollars to #holdTheLine and keep their stock, so that the hedge funds like Melvin Capitol will lose billions of dollars, and maybe go bankrupt. And many people who had faith in America as a free market are suddenly questioning whether it is a fair system.
Prefer your explanation of the GME short squeeze as a rap song? Here it is from Yung Quant
Yung Quant – GME
Karma has a degree in writing and sociology. She’s an Americorps grad and a board member of the California Writers Club. Her first foray into human rights work was with the Westcott 12 activists who launched a 100+ day camp out in protest of sweatshop labor. Since then she’s organized with IndyMedia, Occupy Oakland, and most recently with Solidaridad Con Los Ninos, a group that organizes caravans to visit detainment centers. She loves street art, poetry, and dancing with wild abandon.
