Who wins when an army of red ants attack a big-bulky elephant? That is pretty much the fight between retail traders and hedge funds as they attempt to make profits from an unloved GameStop stock. Bonus: it does leave a lot to grasp for the emerging Bitcoin industry.
A Little Background
For months, some Reddit users—led by an alpha going by the pseudonym DeepFuckingValue—have pushed traders to invest in GameStop, a video game retailer attempting to survive the coronavirus pandemic. Earlier in January, GameStop’s board appointed Chewy founder Ryan Cohen, giving bulls the first sign of the retailer’s revival.
Nevertheless, their possibility of making profits fell short as soon as they found that well-capitalized hedge funds like Melvin Capital had bet heavily that GameStop’s stock prices will fall.
Such a bet is called shorting. In doing so, an investor borrows shares and immediately sells them, hoping to buy them back later at a lower price, return them to the lender, and pocket the difference.
And GameStop was at the center of such market manipulation. At one point in time, more than 100 percent of its shares were out on loan. It illustrated that how big investors can borrow the stock, sell and relent it many times.
Retail traders acknowledged that if they could push the GameStop stock price higher, they could effectively leave Melvin Capital and other short-sellers grappling with major losses. The so-called “short squeeze” turned out to be successful, forcing hedge funds to close their bearish positions at heavy losses.
The GameStop stock (NYSE: GME) surged by more than 2,200 percent in just two weeks of trading.
Warnings, Halts, Investigations, Who Cares
Many analysts and strategists warned that investors that were buying these shares risk losing a lot after the FOMO fades. GameStop could easily use the higher valuations to raise new equities, which may end up diluting existing stockholders.
It happened with AMC, a coronavirus-hit cinema chain whose stocks rallied in a similar fashion as that of GameStop. Its stock rally prompted its creditor Silver Lake to swap risky debts for stock.
But on Thursday, both GameStop and AMC fell more than 40 percent following multiple trading halts on zero-fee commission trading platforms such as Robinhood.
Many including Tesla and SpaceX founder Elon Musk and Reddit Co-Founder Alex Ohanian criticized the move while Rep. Alexandria Ocasio-Cortez, member of the House Financial Services Committee, called out for an investigation against Robinhood, illustrative siding up with Redditors that are now considered financial revolutionaries.
Some burnt investors filed class-action lawsuits against Robinhood in the U.S. District Courts for the Southern District of New York and the Northern District of Illinois.
Meanwhile, on WallStreetBets, the subreddit where the GameStop’s short-squeeze originated, one popular post urged traders to “Buy High, Sell Never,” a slogan reminiscent of the Bitcoin investment ideology “HODL,” a meme alternative to “hold.”
Bitcoin and Gamestop-like Crowd Frenzy
In reaction to brokerage firms halting the buying of GameStock and other securities, many investors jumped into the cryptocurrency markets, an industry still operating away from full-fledged regulatory oversights.
Bitcoin’s meme rival Dogecoin was at the epicenter of such a mania. A WallStreetBets-like copycat subreddit urged traders to pump DOGE, Dogecoin’s native crypto. As a result, its market capitalization surged by more than 800 percent.
A day later, the price of Bitcoin surged above $37,000 after Elon Musk endorsed it in his Twitter bio, partially related to the surge in the GameStop share price by Reddit users.
That leaves the Bitcoin market to a lot of interpretations, especially as bulls continue to anticipate that its value would one day hit $100,000.
Notwithstanding the fundamentals, that propagate Bitcoin as a primary competitor to gold’s safe-haven status—with analysts at JP Morgan Chase, Bloomberg, and Guggenheim noting that the cryptocurrency would mousetrap a portion of the precious metal market’s cap—the arrival of GameStop-like frenzies prove that traders can orchestrate a rally anytime they feel like.
Should it happen, the BTC/USD exchange rate could easily rise by 1,000 percent in days or weeks, even though it would have no legs to stand on.
“I do think this is a seminal moment. I don’t think we go back to a world before this because these communities, they’re a byproduct of the connected internet,” Mr. Ohanian said in an interview with CNBC on Thursday.
“Whether it’s one platform or another, this is the new normal.”