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The GameStop fiasco has been the talk of the town for a few weeks now. What started as a meme ended with short sellers losing billions of dollars in a short span of time. It's quite extraordinary that a bunch of regular people with no prior experience in the stock market managed to do such damage to Wall Street professionals.
Billionaires and hedge funds have been manipulation the stock market for years. Upon seeing an opportunity to turn the tide, Reddit users from r/wallstreetbets hatched and executed a well-coordinated plan that left Wall Street dumbfounded.
There's more to this than meets the eye. Here's an explainer on how the entire situation was even made possible, to begin with.
Robinhood
In 2013, Vlad Tenev founded a company called Robinhood. As can be ascertained from its name, the company built a trading platform that allowed regular folk to trade.
The platform revolutionized investing by allowing commission-free stock trading. The app gave access to a large number of new and inexperienced traders, popularising communities like r/wallstreetbets.
What is WallStreetBets?
The average stock market trader takes calculated risks by analyzing the market, researching stocks, and investing over a long period of time. The average WallStreetbets investor wants to make a quick profit by turning a small investment into a huge fortune. Such investors have little to lose and a lot to gain.
Members of the group refer to themselves as "Degenerates" and have a catchphrase called YOLO' (You Only Live Once). Contrary to popular belief, these users don't really buy stocks systematically like Wall Street professions but depend on leveraged tactics.
While there have been few success stories like the GameStop incident, most investors tend to lose out massively.
WallStreetBets had been called out prior to the GameStop fiasco by various individuals and media. As the group functions without a plan of action, it had been labeled as "Iresponsbiel trolls." This is why they were never considered a serious threat by Wall Street professionals until the events in January 2021.
GameStop featuring Hedge Funds, Robinhood, and WallStreetBets
GameStop, the video game retail store, wasn't doing well. Wall Street hedge funds were short-selling to drive the stock price down, which would push the company to file for bankruptcy.
Short selling is borrowing stocks at a price, immediately selling them for the market price, and eventually buying them back at a lower cost. The difference is kept by short-sellers like a profit.
However, WallStreetbets did the exact opposite by getting users to go on the Robinhood app and buy as many GameStop stocks as possible. This quickly raised the cost of stock from $19 at the start of January to a whopping $480 at its peak.
While this short squeeze tactic is commonly practiced on Wall Street, never before have the professionals been outplayed at their own game by a bunch of novices. Several hedge funds had to be bailed out after losing billions to not go bankrupt.
The Goldman Sachs Group Inc. even warned news outlets that the entire market could collapse if the short squeeze persisted. The situation got so out of hand that the White House stated that it would look into the matter.
When regular investors were finally making a profit from GameStop, Robinhood began freezing transactions and restricting users from buying GameStop stock. Following these events, Robinhood was hit with lawsuits, and protestors took to the streets.
The GameStop situation has now leveled out, and things have gone back to normal. Many financial experts are still dissecting how a bulletproof institution like Wall Street could have been outplayed by a bunch of people whose motto is YOLO.
