How This Reddit Community is Bleeding a Major Wall Street Hedge Fund Dry: GameStop Saga Explained

An investment by definition is an asset obtained in the hopes of generating income and there are usually two ways of going about it. You can either put your money in safe long term bets that will compound your wealth over time or take riskier bets in the hopes of higher returns. But there’s a third way and that involves YOLOing your entire life savings in the GameStop bandwagon hoping to make six figures while also bleeding a Wall Street Hedge Fund dry in the process. But in all seriousness, this is history being made and if this event doesn’t find a way to the box office, I will continue to remain very bullish on a Netflix episode.

So! if you want to know what’s up with $GME read on. 

GameStop and Covid-19

Well this story would be incomplete without a primer on GameStop. The company as many of you know is a retail chain that sells video games and consumer electronics. Now the Covid pandemic has spared no industry, but specifically has been very harsh on retail chains with physical stores.

With strict lockdowns in almost every major economy, brick and mortar stores are bleeding money left, right and center and most of these companies are finding it very hard to stay afloat. On top of this GameStop had troubles way before the pandemic.

The Video Game landscape is changing very fast and there has been a major shift in the way people buy games. With faster internet speeds across the world and rapid digitization, physical copies are losing relevance and an ever increasing amount of people are buying their games online. So basically GameStop is losing its core business and going the way of Blockbuster.

Now you can add two plus two and figure out why GameStop stock has been declining in value over the last few years. Basically nobody in their right minds would invest in a company that’s losing relevance fast.

Enter r/WallStreetBets

The pandemic bound a majority of us to our homes and for a lot of people this was the perfect time to try new things. For the folks over at WallStreetBets, “new things” could mean using Robinhood as their personal casino.

Jokes aside the r/WallStreetBets subreddit is a community for those interested in the stock market. Now this isn’t a super serious forum where you would find detailed analytics for investment tips, but its a rather fun loving community with the usual meme posts and the occasional banter. This sub is specifically popular for its YOLO trades which either result in complete decimation of capital or return unimaginable gains.

So how has this community managed to pump GameStop stock to the moon, which is at $148 now? (Almost 40x from July last year.) And how is it hurting some of the big firms at Wall Street? Read On!

Has GameStop Struck Oil Then?

Well, no! GameStop still faces the same challenges as before and apart from a change in management who are planning on a digital shift, nothing per se has changed on the ground. GameStop’s future looks grim and is seemingly a great bet for short sellers.

So briefly explained, short selling is an investment where you make money if the price of the stock goes down. When you short a stock, you basically rent it from your broker and immediately sell it, in the hopes that when the price goes down you can buy those shares again and return it to your broker pocketing the difference as profit. For example, if you short sell 1 share of Microsoft at $100 and if the stock price happens to go down to $80, you will pocket a gain of $20.

While short selling helps you make money in a bear market, its a riskier bet by nature. You see if someday the stock price of Microsoft goes to 0, you can only make a maximum of $100. But if it goes against your speculation and rises, you can lose your entire investment.

This is where Wall Street comes in, many big hedge funds shorted GameStop stock, for them it was easy money for an obvious move and GameStop stock kept getting hammered.

Normally these hedge funds would make a lot of money when they unload their positions, but the markets can surprise even the mightiest of investors and what’s worse? This comes from a group of investors that would buy a stock just for the memes.

To The Moon

Some of the folks at r/WallStreetBets can be reckless but don’t confuse them with stupid. The recent rally in GameStop stock price is coming from increased demand as the entire community rallied together to buy and hold it.

So what’s the endgame here? Fundamentally, there is no way GameStop is worth that much and anyone who entered the trade early would be looking to exit after making a decent profit from the rally. Well, WallStreetBeters are a smart bunch, they know if they can collectively hold and move prices further, big firms shorting the stock will continue to face losses and eventually receive a margin call where they will have to buy back those shares immediately which in turn will drive prices further ending in a bad cycle for the bears.

David vs Goliath

https://twitter.com/magicmiketrader/status/1354249837835931651?s=19

For a lot of people its not all about the money, its also about standing up to big Institutional investors and beating them at their own game. Its not often that a renowned hedge fund has to get a capital infusion of $2.8 billion to cover their shorts and that too against a subreddit of casual investors.

Now not all the momentum has come from r/wallstreetbets, looking at traded volumes it seems the big fishes are stepping in too, also a tweet from Elon probably helped. GME has crossed the $200 mark in after-hours trading at the time of writing this article. Will it manage to reach the moon? Only time will tell.

Indranil Chowdhury
Indranil is a Med school student and an avid gamer. He puts his absolute faith in Lord Gaben and loves to write. Crazy about the Witcher lore, he plays soccer too. When not playing games or writing, you can find him on 9gag spreading the Pcmasterrace propaganda.