Reddit? GameStop? Stock market? BAMBOOZLED? It’s okay, I was too.
Let’s take it one thing at a time.
Starting about six months or so, and even more significantly since mid-January, US video games retailer GameStop’s stock prices have increased 8000 percent from less than $5 to over $350 on Wall Street. Not bad for a company that’s been closing up its shops since 2016, citing multi-million financial losses as digital distribution on Steam, Xbox Live, PlayStation Network, and other online channels have replaced discs and, in 2020, the COVID-19 pandemic complicating shit even more.
Inevitably, as business has declined, GameStop shares have been subject to “short selling” on the stock market.
WTF IS SHORT SELLING?
If an investor – a hedge fund, for example – expects a share price to drop, they can borrow a share (with a transaction cost), sell it immediately at its current value, and then “cover” or purchase a share when the share price drops – making a profit in the process. That’s short selling.
Hedge Funds R Us borrows a CorpCorp, Inc share from Boomer Brokerz for a $1 transaction cost, and sells it for $10. When CorpCorp, Inc’s share price drops to $5, Hedge Funds R Us covers the share, and cashes a profit of $4.
It’s also obviously a gamble, because if the share price doesn’t drop, or even worse, it increases, that investor is obligated to cover the share at the new price instead. This can result in a short squeeze.
WTF IS A SHORT SQUEEZE?
Our investor can now cover and quit, or try to minimise their losses by borrowing additional shares – which, inconveniently, also increases the share’s valuation, and then increases the share price as other investors jump in. As the number of available shares decreases, the demand for those shares and, consequently, the price of those shares increases. That’s the short squeeze.
Hedge Funds R Us borrows a CorpCorp, Inc share from Boomer Brokerz for a $1 transaction cost, and sells it for $10. CorpCorp, Inc’s share price increases to $300 because the entire system is speculative and unpredictable, and short selling that share was a bad decision. Also, in reality, it’s not just one share. It’s, like, hundreds or even thousands of shares.
So our first investor is now stuck with an obscene amount of debt when the cover comes due.
MEANWHILE, ON REDDIT…
Described as “like 4chan found a Bloomberg Terminal”, the WallStreetBets subreddit is more or less exactly that – a chaotic disorganisation of inscrutable memes and casual stock market investors who realised that, over time, unscrupulous investors had short sold 140 percent of GameStop’s shares – more shares than were actually even available. Remember that those investors must purchase those shares to cover their short position in the market. Those are the rules.
In an unconventional display of cooperation, WSB subscribers decided to purchase GameStop shares, increasing the demand and price of those shares, and fuck over the hedge funds short selling the company’s stock for the lolz.
Hedge funds like Melvin Capital Management, which closed out its short position on Tuesday, according to CNBC, with undisclosed losses estimated in the billions.
NOW WHAT?
Short sellers go bankrupt, capitalism is cancelled, and Jeff Bezos has to work in one of his own warehouses which is now a potato farm. Or the internet finds a new joke. Who knows.