You have been sent here because your child, partner, or friend suggested that you invest your life savings into GameStop stock and you are curious what the fuck is going on. This post is long and thorough and mostly does not discuss memes and "the internet" until the end, but if you read it you will hopefully understand What Is Happening.
What is going on is that GameStop, a company that sells physical copies of video games next to Auntie Anne’s pretzel shops in dying malls, is the most highly traded asset in the United States, a “meme stock,” and currently the primary front in a micro class war. GameStop’s stock price jumped from $4 last summer to $20 at the end of 2020, to $40 two weeks ago. It was worth $100-ish at times on Monday and Tuesday, and as I write this it is worth close to $300. Essentially, many normal-ish people have made a huge bet against gigantic financial institutions and are currently winning. In practice this means we are seeing one of the largest wealth transfers from the financial ruling class to the middle and middle-upper classes in recent memory, so it is, understandably, the only thing anyone is talking about.
How did this happen? A bunch of Redditors in the r/WallStreetBets subreddit, led by a person going by "DeepFuckingValue," analyzed GameStop stock and concluded that its price was undervalued. They then, over the course of months, identified a weakness in the strategies of several giant hedge funds that had bet many millions of dollars that GameStop would fail.
These Redditors purchased huge numbers of GameStop stock at low prices (and then kept buying more as the prices rose), held it, and are currently forcing something known as a “short squeeze” that is driving the price up and is emptying these hedge funds in the process. These Redditors are diamond-handing (holding) their stocks, imploring each other to not be a weak-minded stock seller (paper hands) and are waiting for their messiah Ryan Cohen—the CEO of Chewy.com who invested millions in GameStop last year—to hitch them to his rocket and take them to the moon/sun/Mars (become very rich).
A few weeks ago I became interested in WallStreetBets. I bought 14 shares of GameStop, knowing that if I put a small amount of money in I would actually pay attention to the subreddit and what people were writing about. I did not expect the stock to become worth any money but now I can afford to fix my broken car. I do not have other stocks outside of my 401k.
Elon Musk, random venture capitalists, and Mad Money Jim Cramer are all ancillary characters who have made cameos on this journey, and you've got a lot to catch up on:
WHAT IS GAMESTOP:
GameStop is the number one physical video game retailer in the United States, which means a lot less than it used to in the 1990s, and also has a bunch of stores internationally. GameStop has been closing stores and losing money over the last few years because of the slow death of retail, caused largely by digital storefronts such as Steam and companies like Sony, Microsoft, and Nintendo opting to sell digital copies of their titles on their own digital stores. The pandemic has also not been good for GameStop. Even though video game sales are skyrocketing, GameStop is a physical store and had to close many locations to comply with COVID-19 restrictions. Sales fell by a third in the first quarter of 2020.
This has led many financial forecasters to declare that death is inevitable for GameStop, a prognostication that led big hedge funds and capital firms to “short” GameStop stock.
WHAT IS ‘SHORTING’ AND WHO IS DOING IT?
“Shorting” is a bet that a company's stock will become less valuable. This is done when an investor sells shares of a stock that they do not own. Essentially, they sell shares of a stock at a certain (high) price in the belief that sometime in the near future the price of that stock will go down. They will then be able to buy the stock at the lower price to “cover” their shorts, “closing” the deal and pocketing the difference between the price they sold at and bought at as profit.
This is something that giant hedge funds do all the time, often to the chagrin of CEOs like Elon Musk. Often, by betting against a company short sellers are able to put downward pressure on the stock price. What this means is that a struggling company’s stock price can go down simply because a giant hedge fund invests millions or hundreds of millions of dollars shorting it. The mere act of a hedge fund—which are smarter than everyone else, the thinking goes—betting against a company can start a news cycle where investor-types think a company is going to fail, investors sell or get scared, and the stock price goes down. The short sellers win and make a bunch of money.
Sometimes, however, short sellers lose. This happens when they bet on a stock price to go down, but it goes up instead. The important thing to remember here is that there is theoretically no limit to how much money a short seller can lose. This is because if a short seller shorts a stock at $20, the stock price can continue to go up and the short seller must, at some point, buy that stock to close its position and fulfill its side of the bargain. If I short one stock at $20 and the price of that stock goes to $1 million, I still at some point have to buy that share to close the deal. In this case I would lose $999,980.
In this case, a company called Melvin Capital Management shorted millions of dollars in GameStop stock. Another company called Citron Research shorted some large amount of GameStop stock and has also spent much of the last several months explaining why GameStop is a dogshit company that is going to fail. These are companies that most (normal) people have not heard of but are a big deal in the financial world.
These companies (as well as a few others), made risky bets that GameStop stock would continue to go down, allowing them to profit immensely, as they usually do. But not this time.
WHAT WENT WRONG FOR MELVIN, CITRON, AND THE SHORT SELLERS, INITIALLY
As I mentioned earlier, short sellers at some point have to actually buy shares of the company they’ve shorted in order to close their positions and exit their deal. If they do this when a stock's price is higher than their short, they will lock in their losses. So Citron and Melvin and other short sellers have been playing a fabulously expensive game of chicken. Because for the last few months, GameStop stock has slowly been increasing in price.
The bullish case for GameStop is predicated on the fact that it had a good earnings report earlier this month (its digital sales were up 309 percent), and also saw a big investment from a guy named Ryan Cohen, who is the cofounder of the online pet store Chewy. Chewy is a very successful company and Cohen is seen as a very competent person. Cohen revealed a nearly 10 percent stake in GameStop in September of last year, and upped his stake to nearly 13 percent in December. His investment eventually led to him joining GameStop’s board of directors with ideas like pushing digital sales in tow, which drove investor confidence in the company (because of his prior successes), and pushed the stock price up.
It also drove positive media coverage, which, sometimes, can also drive stock prices up. With GME stock prices going up, Melvin, Citron, and short sellers have been waiting for a price crash to cover their positions that has never come.
The most important thing (as I understand it, at least), and a situation that happens only very rarely, is that short sellers shorted more shares of GameStop than actually exist. What this means is that even if every single short seller wanted to cut their losses and close their positions, they would be unable to do so because the shares don’t exist. Normally this isn’t that much of a problem because over time they’d be able to buy enough stock to close their positions due to people buying and selling stock back and forth. In this case, however, Redditors noticed what was going on and have royally fucked short sellers.
Crucially, Redditors on WallStreetBets are holding their stocks Because people haven’t been selling the stock, and because it’s continued to go up, short sellers have been unable to cover their shorts without locking in billions in losses and are unable to cover their shorts entirely because the stock has been over shorted.
Here is where things get truly complicated and beyond the scope of this blog. Essentially, you (meaning you, the average person) can buy shares at the market price, no problem. But short sellers want to see a sell-off frenzy, where prices plummet and they can buy huge numbers of shares to reduce their losses or, ideally, lock in their gains. Big short sellers needs to quite literally buy hundreds of thousands or millions of shares, and so they are left waiting for a selling frenzy that may never arrive, or won't come until GameStop has become worth many hundreds or thousands of dollars per share.
Anyways, this brings us to Reddit and WallStreetBets.
WHAT IS WALLSTREETBETS
This is what WallStreetBets looks like on Reddit:
And this is what it looks like on Discord:
And this is what it sounds like:
r/WallStreetBets is a subreddit that describes itself as “4chan with a Bloomberg Terminal,” which is the laziest but probably most apt way to think of it. It is a subreddit for people who like to gamble on the stock market that has its own culture, terminology, characters, and villains. It's also very toxic, similar to 4chan. You can broadly think of WallStreetBets as a bunch of investors who think that it is very boring to take a small portion of your paycheck and invest it in your 401k and wait to get old to be rich. It is full of day traders without a ton of money who YOLO their money into a single stock (invest their life savings, or their mom’s life savings, or their student loan payments, or their paychecks), to hopefully realize a giant profit in a short period of time by taking advantage of temporary price movements.
Historically, the top posts in this subreddit are “loss porn” and “gain porn,” which are screenshots of people’s investment portfolios showing how they turned a small amount of money into a huge amount of money in a short period of time, or turned a huge amount of money into a tiny amount of money in a short period of time. The broader financial investment world thinks these people are morons and degenerates, and the prevailing financial wisdom is that investing a significant amount of money into specific companies' stocks (versus index funds that mirror the entire market or an entire market sector) is very risky and best left to pros and People Who Know Better, such as giant hedge funds and billionaires. This is the type of advice that financial advisors and podcasters have to give because “take a cash advance on your credit card and invest it all into a stock symbol that you picked randomly from a Ouija board” is not defensible and not advisable to the public at large.
All of that said, the stock market has been increasingly unmoored from the actual economy, with the stock market as a whole skyrocketing in price over the last 24 months even as hundreds of thousands of people die from a pandemic, millions of people lose their jobs, and billionaires get richer while the rest of us get poorer. Picking random stocks and investing money into them has been a legitimately successful strategy for many people over this short time sample period. It surely will not last. But nonetheless it is working.
WALLSTREETBETS AND GAMESTOP
In September 2019, a redditor named DeepFuckingValue posted a screenshot of himself investing $53,000 into GameStop stock over the preceding few months, at prices of between 30 cents and 75 cents per share. On that day, his shares were worth $113,000, a gain of 86 percent. GameStop stock was worth 85 cents at the time.
This post didn’t take off, but over the months, DeepFuckingValue, who goes by the name "RoaringKitty" on YouTube, continued to post updates on their GameStop YOLO. On YouTube, they laid out their case for why they invested in GameStop, which largely came down to GameStop’s strong online sales, the fact that it was closing stores (reducing costs) and that its per-store revenue was increasing as it did so.
Other redditors and DeepFuckingValue eventually caught on that something else was happening with GameStop stock: It was the most shorted stock in the entire stock market. That, combined with what DeepFuckingValue described as “strong fundamentals,” suggested that, at some point, these short sellers would be forced to close their positions. The opportunity, as I mentioned earlier, is that short sellers overextended themselves and would only be able to close their positions: A) at a loss and B) if suddenly a bunch of people who own GameStop stock sold their stock, which would drive it down.
WallStreetBets at the time had more than a million subscribers, and DeepFuckingValue's gain porn was going viral on the subreddit back in December, when the stock prices were around $4. His gains led more people to invest in GameStop, further driving the price up. People began to write treatises on why they believed GameStop was a good investment, leading to more investing. All of this put more pressure on short sellers, which helped snowball the stock up, leading to unrealized gains for all.
The rallying cry of the entirety of the WallStreetBets subreddit and its extraordinarily chaotic Discord became: buy GameStop stock, hold it, and fuck over the big hedge funds, specifically Melvin Capital and Citron Research, which, throughout this entire saga, was publishing various YouTube videos about why it believed GameStop stock would go down.
This created a trollish us-versus-them mentality. If you bought GameStop stock, you are cool and going to become rich. If you sell GameStop stock before you ride its rocket to Mars, you are a coward and are only helping these big hedge funds and fucking over your fellow Redditor. All throughout this, DeepFuckingValue's account went from $50k, to $100k, to several million, to $10 million, to $20 million. DeepFuckingValue did not sell their stock, as far as we know—if they could be brave enough to hold then, you, a lowly investor, could afford to also hold your stock, further driving the price up as Melvin and The Establishment began to sweat.
WHY THE STOCK HAS GONE COMPLETELY BANANAS
This brings us to this week. By all accounts, Melvin Capital is in deep trouble. Earlier this week, it took in $2.75 billion in funding, reportedly to help cover its GameStop shorts. A prominent venture capitalist said he was buying GameStop stock. Every financial publisher is talking about GameStop stock. Elon Musk, who, again, famously hates Tesla's short sellers with a burning passion, tweeted about GameStop stock and said that he's hanging out in the WallStreetBets Discord. Meanwhile, the GameStop shorts have seemingly not figured out an elegant way out of this. Many prognosticators and analysts on WallStreetBets have been writing posts explaining why they believe GameStop stock will go over $1,000 or $5,000 per share, which involves a scenario where banks and investment platforms themselves require short sellers to cover their shorts all at once, which will make the stock go even crazier than it already has. This seems to be the prevailing wisdom among GME investors at the moment—the stock is worth $350 as I write this, but most people on the subreddit seem unsatisfied. They are out to make a life-changing amount of money and they are out for hedge fund blood.
IS THIS ILLEGAL / WHO IS GOING TO JAIL?
Probably no one is going to jail, but some hedge funds will likely go bankrupt. WallStreetBets is not “manipulating” the market, really. People are posting publicly-available information and their own analyses of what they believe a stock will do, and hundreds of thousands or millions of people are reading that analysis and acting on their own. They are largely doing what stock prognosticators do all day every day on TV shows about stocks.
WHAT ABOUT NOKIA, BEST BUY, BLACKBERRY, AMC, ETC
WallStreetBets is also investing heavily in Nokia, Best Buy, Blackberry, AMC Theaters, and other stocks. I am not a financial expert and don’t know what will happen with these but in the short term these stocks have also seen large gains (but smaller than GameStop). All of them have been shorted, but not shorted as heavily as GameStop.
WHAT THIS ALL MEANS
The financial press is trying to explain what this means for them, hedge funds, capitalism, the economy, and the stock market moving forward. Internet culture reporters are trying to explain if this is GOOD or BAD, if this is the Donald Trump-ification of the stock market, where a meme or troll gets out of control and causes unprecedented havoc on the real world. Anthony Scaramucci, of all people, is calling this the "French Revolution of finance."
It is true that this means something and that this is likely a big moment. We are seeing, I think, the democratization of financial information, at least to some extent. While we've seen technology like deepfakes and facial recognition filter down from research firms and big companies into the hands of ordinary people and amateur technologists who then use them for whatever purposes they want, we are seeing financial technologies, information, and analysis becoming available not just to hedge fund managers, financial institutions, and the very rich, but to the masses.
It is clear that there is a sect of WallStreetBets who either previously or currently work in the financial sector who are fed up with increasing inequality, are tired of watching giant corporations repeatedly fuck over ordinary people, and are explaining how it all works to huge groups of people. What they are doing is risky, but it's not "very stupid." We have been told for decades that the banks and the people who work at Goldman Sachs and Fidelity and hedge funds none of us have ever heard of are smarter than us, that they deserve to be rich, that they should be the ones who pull the levers on the economy, that they should decide which companies are good and which are bad, that they should be the ones who help make financial regulations. All along the way they have gotten fabulously wealthy and we have been stuck with stagnant wages, record consumer debt, and financial advice that tells us to wait until we are old to retire.
WallStreetBets says this is a new paradigm where the masses have the power and hedge funds are scared. A top post on the subreddit this morning was called this: "FOR ALL THE BIG FUCKING HEDGE FUNDS MONITORING US, THIS IS A MESSAGE FROM US TO YOU, WE FUCKING OWN YOU NOW, FUCK. YOU."
It's unclear how far this will go. After all, people with thousands of dollars to invest in GameStop still have thousands of dollars to invest with, unlike the millions of people in the U.S. currently out of work due to a deadly pandemic. The free investment app of choice, Robinhood, was also just fined by the SEC for hosing its own customers by seeking favorable rebates instead of the best prices for its users. And even if some hedge funds are getting bodied by retail investors, the massive funds such as Fidelity and Blackrock that own tens of millions of GameStop shares are probably just as happy.
We are not witnessing the death of the financial class. But for the normal people who have invested in GameStop, well, making a few thousand dollars at the expense of Wall Street fat cats is a good prize.