The Legend of GameStop and the Wall Street Bets Subreddit
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posted 27 Jan 2021 by Krister Axel
Some of the people that wanted to short GME are now buying it back to cut their loses in case the stock keeps going up.

Last week, it was Bean Dad. This week, it is the David and Goliath story of Reddit versus Citron Research, Melvin Capital, and other bottom-feeding hedge funds. Explanation via Twitter:

Basically a bunch of investors are trying to 'short' GameStop stock (GME). Shorting a stock means you borrow a stock from someone that you predict will fall in price. By doing this, you can sell the stock at its current price (say 50 USD for example) and when the price drops, you can rebuy it (for 30 USD for example) so you can return it to its owner, but you pocket the difference as profit.

The problem with this is: What if instead of the stock going down, it goes up?

People that tried to short the stock will eventually have to return it, so they will have to buy it at its current price. If the stock goes to 80 USD instead of 30, they will lose 30 USD. When you buy stock, you can only lose the amount you invested in that stock, but when you short stocks, your losses are potentially infinite since there is no limit to how high its price can get.

At the same time, people shorting stock have a maximum profit equal to the price of the stock since its price can't fall below 0.

People in Reddit noticed that some people were trying to short GME, so they banded together to buy a bunch of GME stock.

When stock demand rises, its price rises (the law of supply and demand) so Reddit effectively made GME price rise, foiling the plans of institutional investors who were looking to profit off the fall of GME.

The issue with this is that this rise in price is artificial as there is no way GameStop can return that investment currently. Eventually these people will stop buying GME which will crash its price, causing a lot of losses among those that bought GME when the price was higher. So basically this becomes a race between shorters having to rebuy the stock they were trying to short, and the artificial bubble created by Reddit bursting. Adding to this, some of the people that wanted to short GME are now buying it back to cut their loses in case the stock keeps going up. This in turn creates more demand and drives the price even higher. This is called a 'short squeeze.'

As a whole, Reddit people that created the bubble will lose a lot of money when it bursts, but individually they won't probably lose much and some individuals may even make profit from this. On the other side, hedge funds that wanted to short the stock will lose, BIG.

Finally, some have asked: why is Reddit doing this? The answer is that shorting a stock is basically profiting from a company's failure, which is seen as predatory by many. By doing this, Reddit is effectively punishing those who wanted to profit from the fall of GameStop.

Short-seller net-of-financing mark-to-market losses in GameStop have reached an incredible $5 billion in 2021 as the company's stock continues its historic run, according to data from the financial-analytics firm S3 Partners.

Wall Street Bets on Reddit.

More info via Business Insider.

Photo credit: Lloyd Blunk.

Read this story on Apple News.

UPDATE: Robinhood just locked trading on a basket of stocks that are being shorted by the institutional players, because regular people were making too much money. Which proves once again that any time the poors find a way to get any sort of financial foothold in this world the billionaire class will move swiftly to crush them.

About the Author

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Krister Bjornson Axel

Ashland, Oregon

Paris, France. Madison, Wisconsin. Los Angeles. Ashland, Oregon. Ottawa. I write music, I write about music, and I write code. See also: photography, prose, podcasting. I have 1 gorgeous wife, 2 amazing kids, and many interests.


Recent Awards: 2020 ND (Photo) Honorable Mention, 2020 Accenti Writing Contest Finalist


Read my poetry here.