Everything You Wanted to Know about GameStop
Posted: August 17,2022
You woke up this morning and it’s all over the headlines: the stock market has gone bananas over GameStop, the chain of shops that still enthusiastically sells physical copies of video games in a dying market. Every market expert would’ve told you this company was destined for bankruptcy. Until now.
You want to know what’s going on, but you’re not into stock, investment, hedge funds, and short-selling. Worry not - we’ve got you covered.
In a nutshell, this is a poignant paradigm about ordinary people who have managed to outsmart fabulously wealthy and greedy hedge fund companies. Who’s the loser in this historical battle? Hedge funds. Here’s why.
What big hedge companies such as Melvin Capital Management and Citron Research are doing is short selling: borrowing shares of a company, then manipulating the stock market into believing that the company is going to go bankrupt.
They keep forcing down the price, investors get scared, the stock price keeps going down, then eventually the big players can pay back these shares and make a bunch of money. It’s a tale as old as time.
But this time the story has taken an unexpected - and frankly satisfying - turn. The hedge funds we’re talking about got too greedy. Shortening GameStop from $20 all the way to $4 - and in the process making millions of dollars while almost bankrupting this company - wasn’t enough for them. They ended up borrowing 140% of all the shares available, more than actually exist. That’s a key detail.
This is where our modern-day heroes step in. Someone from the WallStreetBets subreddit realized this and spread the word. Redditors started to buy and hold shares via the Robinhood trading app, driving the price up like crazy.
Why would they get involved in such a risky game of chicken? First of all, many of these Redditors used to be huge fans of GameStop back in the days when purchasing physical games was cool. On top of that, most of them are millennials whose lives were deeply affected by the Global Financial Crisis in 2008; a disaster that destroyed the prospects of millions, just not those who actually created it. These Redditors saw that the time for revenge had come.
In just a couple of exciting days, GameStop stock prices skyrocketed from a miserable $4 up to a mesmerizing $469. Even Elon Musk stepped in, ballooning the percentages with a single tweet in favor of Redditors over short-sellers, who had tried to cripple Tesla so many times.
Even though it seems dodgy and is perhaps on the verge of being illegal, this game does have rules. At one point, hedge funds eventually have to buy all those shares back, at whatever price they can. They got played this time, leaving Melvin Capital asking for a bailout and others on the brink of bankruptcy.
But are we really witnessing the death of giant corporations and the victory of the middle and upper-middle classes? Well, it’s not that simple. Hedge funds have no intention of backing off; they’re asking for the government’s help and calling for legal action against Reddit forums.
What’s more, the well-known Robinhood app - which has been marketed as an attempt to democratize finance for all - curbed the purchase of GameStop shares on Thursday. The restrictions resulted in a price plunge of 55%, causing people to accuse Robinhood of stealing from the poor to give to the rich. The irony is palpable.
With GameStop’s price currently $193.60, the situation is precarious and is likely to have a ripple effect on the market. In this pushback against the establishment, the house of cards might crumble and people might lose millions.
But it was never just about the money; this movement was about sending a message. Fed up with increasing inequality, amateur investors are playing Wall Street at its own game and doing a mighty good job of it.
Think of the GameStop saga as a modern fairytale. This story has it all: the greedy villains, the heroes, and even Robin Hood (or perhaps his polar opposite). The heroes might not win the overall war, but they’ve certainly won the battle and caused some major concern for the villains. And even if it doesn’t last, this one victory has surely been cathartic for all those millennials behind their keyboards.
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With a degree in humanities and a knack for the history of tech, Jovan was always interested in how technology shapes both us as human beings and our social landscapes. When he isn't binging on news and trying to predict the latest tech fads, you may find him trapped within the covers of a generic 80s cyberpunk thriller.