Had you said a year ago that Reddit would be behind one of the greatest upsets in the financial market’s history, we’d have laughed you out of the building. That said we also didn’t think we’d still be under a lockdown thanks to a global pandemic so we’re not all that surprised.
In case you’ve been under a country-sized rock this week let’s recap what has happened thus far.
GameStop, a gaming retailer in the US has been in dire straits since the pandemic hit the world because, as it turns out, folks don’t want to go into a physical store to buy games they could easily purchase online. This led to a decline in the price of GameStop shares.
While this is somewhat normal, users on the sub-Reddit, Wallstreetbets noted that GameStop stock had been shorted by hedge funds.
What is a short?
A short happens when an investor lends shares with the intention of giving them back, only to immediately sell them on. The hope here is that the value of the shares will decrease so that they can buy the shares back at a lower fee, making some money in the process.
It’s a very risky and questionable practice, but it’s legal.
So what happens if the share price doesn’t come down? That is where Wallstreetbets comes into play and precisely what we learned this week.
Noting that GameStop’s share price was low, the investors on the sub-Reddit rallied around the stock and, as you might expect that share price started climbing.
Last week GameStop shares were worth $40, this week it ballooned to a value of $492 and as you might expect, hedge funds who had shorted the shares were none too pleased.
One of the biggest losers in this affair was Melvin Capital which was forced to close its short position on GameStop stock this week. How much the hedge fund lost is unclear according to a report from CNBC.
Robinhood in name only
Throughout the week the internet has been having a right-old laugh at the expense of investors on Wall Street but the meme turned serious when a trading app decided to call the party early.
Robinhood, is an online brokerage app that allows anybody with an internet connection and its app to trade on stock markets.
As brokers stopped the sale of GameStop stock, Robinhood thought that this was a good idea as well. So on Thursday it stopped users from buying stocks that were “volatile”. These stocks, of which there were 13 in total included GameStop, BlackBerry, AMC Entertainment and American Airlines.
While users could sell their shares, they couldn’t buy shares.
If that sounds wrong, you aren’t alone.
A lawsuit claiming Robinhood’s actions rigged the market against its customers was filed in the Southern District of New York yesterday according to a report by CNN.
Further to that Robinhood’s actions drew the attention of New York Democrat representative Alexandria Ocasio-Cortez.
“This is unacceptable. We now need to know more about Robinhood’s decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit,” Ocasio-Cortez tweeted.
What is bizarre here is that Ted Cruz (yes, that Ted Cruz) agrees with Ocasio-Cortez. One has to wonder how badly you’ve screwed up to have Republicans and Democrats agreeing with each other.
Since the filing of the lawsuit, Robinhood has said it will allow “limited” buys of the share it stopped selling.
Meanwhile, the r/Wallstreetbets sub-Reddit is preparing for the market to reopen to continue bumping up the price of GameStop shares.
Much invest! Many gain! Wow!
Yes, there is more to this story because now r/Wallstreetbets is investing in Dogecoin.
Launched in 2013, Dogecoin was created as a response to the frankly ridiculous amount of alt-coins that were being created at the time. Based on the Doge meme which featured the incredibly cute Shiba Inu, Dogecoin hasn’t had success like Bitcoin or Ethereum, until today.
With the goal of getting Dogecoin to $1 per coin, the price of the cryptocurrency has climbed nearly 300 percent in the last 24 hours according to data from Coindesk.
This fascination with Dogecoin is just a few hours old at time of writing so where the price is going would be pure guessing on our part.
Unbelievable cosmic power
The question on everybody’s lips this week is whether r/Wallstreetbets is a sub-Reddit of heroes we didn’t know we needed.
Unfortunately bad apples within that sub-Reddit have drawn the attention of folks online, but we can’t assume that an entire sub-Reddit is bad based on a few bad apples.
What this entire affair has demonstrated, however, is that when people work together, we can make an impact that the world has no choice but to notice.
Shorting shares has been going on for ages and it has been allowed to continue even when it led to the collapse of the global financial market in 2008.
While we won’t call r/Wallstreetbets heroes, it has highlighted the shady practices of investors and forced lawmakers to ask the hard questions they may have been turning a blind eye to in the past.
To be clear, the Redditors behind the GameStop saga weren’t doing anything that Melvin Capital or other hedge funds wouldn’t do. There is nothing wrong with buying shares that are available to purchase.
Where hedge funds seem to take issue is that Reddit brought with it volatility they didn’t anticipate.
And while we could all learn a bit more about the financial sector, our take away from the events of this week is that maybe we should turn this collective power onto something else.
Things like universal basic income are said to be a pipe-dream, poverty is something that we are told nothing can be done about and after this week, we don’t believe that anymore.
If a few million people can get billionaires worried, what could a few billion of us do?
[Image – CC 0 Pixabay]