How a Reddit shuts Down Hedge Fonds — GME Update

Actually, the future of GameStop does not look so rosy; last year, the company’s share price was at the bottom. Many investors had bet on its decline, but the stock recently reached its all-time high. The main reason: A Reddit community. Some speak of stock market manipulation, others of YOLO investment.

With a price of just over two euros per share, GameStop (GME) had seemingly hit rock bottom last summer after years of economic failure. But a look at the company’s share price shows that it had recently skyrocketed, most recently reaching a dizzying all-time high far beyond 100$. By comparison, even at the height of economic activity, the company’s shares had never been valued more than just about 50 bucks. But where did this rocket-like rise come from?

What Has Happened?

One thing is certain: the development is not due to the company’s economic figures and thus a possible reaction from the stock market. GameStop has been running against the digitalization of game sales with its traditional retail business in recent years. Also, the important business, the trade with used games, is facing an uncertain future because of e-commerce and DRM. This had led to speculators on the stock exchange betting on the further decline of the company with so-called short sales.

And this is exactly where the leverage for the current explosion of the share price lies. In the summer of 2020, a user of the Reddit community WallstreetBets — a curiously chaotic association of self-proclaimed “reckless investment idiots” with over 2 million members — announced his forecast: GME (stock symbol for Gamestop) is down, but short-sellers have overdone it with their bets against the company. He would hold an investment of 50,000 dollars until January 2021.

While many initially paid little attention to the user, at the beginning of this year a real hype about the development of the GME share spread in the community. The result: in order to put further pressure on the short-sellers, thousands also began to buy shares in the company, a chain reaction was the consequence. The development of the share price is therefore currently only due to the fact that short sellers are obliged to buy shares, which are much more expensive than they had bet.

A so-called short squeeze, i.e. the explosive increase in the share price due to the shortage of supply of a stock, is not uncommon on the stock market. The price explosion of Volkswagen’s common stock in October 2008 is a classic example. The current development around GME, however, has reached a completely different dimension. A loose association of self-proclaimed stock market trolls is competing against classic financial investors. As the development of the share shows, the war is going on. It will be interesting to see how GME develops in the coming days. WallstreetBets’ “You only live once” forecast: 1000 US dollars and more.

With the rise of GME, the subreddit has also started to push the BlackBerry and NIO stocks.

To the moon, GME!

Critics

Especially big institutions accuse r/wallstreebets of market manipulation. The community, on the other hand, has a different look at the situation. A moderator of the subreddit comments the following:

“What I think is happening is that you guys are making such an impact that these fat cats are worried that they have to get up and put in work to earn a living,” he wrote. “Some of these guys traditionally used the media as a tool for them to manipulate the market have failed to further line their pockets and now want to accuse you guys as being manipulators. This is complete nonsense… They hate that you played by the rules and still won.” — r/wallstreebets, posted by u/bawse1

Personally, I think it is impressive to experience the power of an internet community and how “the simple men” can influence finance.

Nonetheless, I feel like biased new investors are blasting lots of money into the market — without a proper idea of what they are doing. There definitely is the danger that people will lose their living by “betting” on the Wallstreet.