How the GameStop Saga Began
During the first days of 2021, the US stock market was keeping tabs on GameStop, but not for reasons you might assume. The company is an American video game, consumer electronics, and gaming merchandise retailer with brick-and-mortar stores throughout the USA.
Although the value of its shares was gradually rising since Sept. 2020, it was assumed that GameStop would soon go bankrupt, as it was heavily affected by the COVID-19 crisis. Furthermore, many experts stated that its business model was outdated due to digitalization. However, these forecasts were dead-wrong.
Reddit Intervenes
The seeds of the GameStop surge were planted back in April 2020. The Reddit user u/DeepFuckingValue (DFV) shared an interesting prognosis on the WALLSTREETBETS (WSB) subreddit. DVF looked for declining businesses with high short-exposure and eventually stumbled upon GameStop. He suggested that GameStop’s situation was nowhere near as bad as the experts predicted, as the business had a lot of cash and was able to pay off its debts.
Also, it was discovered that 84% of GME stocks were held as short positions, an indication that hedge funds were betting big on an insolvency. Thus, DFV opened a long position on the company and invested a little over $40,000 on it. His plan was to promote this theory and convince other users to join in on the action.
Things began to kick off at the end of 2020 when Microsoft and GameStop announced a strategic partnership that. For Reddit users, that was a sign that the video game retailer wasn’t going down the drain. On January 11, 2021, the craze really caught on when GameStop announced that startup billionaire and activist investor Ryan Cohen would join the board of directors. The price per share was rising again at this point, and it became clear that hedge funds were trying to manipulate the market.
The WSB community then began to promote the idea of buying and holding GME stocks en masse. This created an army of retail investors that bought up shares in a coordinated way, forcing professional Wall Street investors into a “short squeeze.” Hedge funds began to close their short positions, which drove the price up even further, creating a massive snowball effect.
Brokerage Firms May Be behind the Action
According to recent news reports, in late 2020 there were certain investors who, citing undervaluation, offered their GameStop shares for short on $40. The tactic worked: GameStop’s share price rose to $40 in the first half of January 2021. In the following days, the value of these shares doubled. On Wednesday (January 27), there was a 134.84% increase, and GME closed on $347.51.
In the case of AMC Entertainment, the price hike began on Monday (January 25) and by Wednesday, these stocks quintupled in value ($19.90). According to the latest data (Feb. 8), GameStop is down to $60.74 and AMC is has reverted to $6.17 on the New York Stock Exchange.
Several articles highlight that by imposing stricter trading conditions, Robinhood and Interactive Brokers presumably halted GameStop from running amok in the stock market. Many criticized the decision of the two brokerage firms, some arguing that these trading platforms were trying to protect the interest of Wall Street firms at the detriment of retail investors.
In addition, GameStop & AMC might not be the only targets on WALLSTREETBETS’ list. Experts warn of a particularly rising trend in the exchange rates of American Airlines, Tootsie Roll, and Virgin Galactic, so the current situation may reoccur in the future.
