GameStop Short-Sellers Lost $6 Billion by Betting Against One Subreddit

GameStop is totally screwed.

GameStop will be to gamers what Hot Topic was to goth kids.

GameStop is a dying retailer in a dying market.

If they’re not bankrupt in a year I’ll get a GameStop tattoo.

GME is in financial trouble and is about to get hit hard.

GME is a portfolio killer, can’t really play it even if it goes in your direction.

GME is preparing for the ultimate fall.

GameStop to close another 300 stores permanently. Buy up GameStop puts.

These were some of the posts and comments made on a popular subreddit from a year ago.

The GME stock was trading in the range of $2-$4 range during the March-April lows of 2020. With the lockdowns already in place, the future of the video game retail business looked grim. More so since it was surviving largely on selling physical games and had to shut down stores when the world sheltered at home.

It’s pretty obvious that the sentiments on that subreddit towards GME were pessimistic until November 2020.

Fast forward to the third week of Jan 2021 and the same stock has surged from a mere $40 price to an all-time high of $150(at the market close on Jan 26th) with the after-market price already way past $300.

That’s a 500% increase in less than a week and a whopping 2x increase in a single trading day despite no earning reports or promising news to draw analysis from.

To top it all, the stock isn’t even a penny stock to let this slide.

Sardonically, there’s only one subreddit forum that’s single-handedly responsible for causing the euphoric, insane, and unarguably the most dangerous short squeeze of a single stock in recent history — r/WallstreetBets.

What the Hell Is WallStreetBets, Anyway?

For starters, WallStreetBets is a popular online community on Reddit with more than 2 million (and counting) subscribers.

The subreddit is wildly popular amongst option traders for sharing memes, DDs, loss, and gain porn.

If you’ve ever got a chance to look at the discussion forums on that subreddit, I’m sure you’d be caught off guard reading the terminology and slang used there.

Unique lingo such as “degenerates”, “fellow autists”, “retards”, and “stonks” might seem rude from a distance, but hang on — surprisingly these are the mildest phrases you’ll ever come across in that community.

Regardless, the subreddit is well moderated and everything said and done is in good humor just to keep the stress levels low in an irrational market.

With near-zero interest levels and the government printing trillions of dollars to stimulate our economy, a herd of new investors has joined the Robinhood app to park their money.

Understandably, these small-time day traders have little to no knowledge about how options trading works. However, by seeing the massive gains people have shared in Reddit’s own casino subreddit(that’s what some refer to WallStreetBets as) they’ve begun flocking towards the online community to get their own lottery-like gains. And also to have some fun with their stimulus checks and to hang out with fellow Redditors.

The Online Community Is Pushing GameStop Towards an Infinite Short Squeeze — Thereby Crippling Short-Sellers

Apple, Microsoft, and Google together have been boosting online game sales for the past decade thereby pushing GameStop’s primarily physical business into oblivion and towards bankruptcy.

So, to say, that WallStreetBets is alone responsible for GameStop’s short squeeze would be a bit of an overstatement — but they certainly acted as the catalyst.

With GME’s outlook largely bearish, large capital management firms had been betting against the gaming business as they didn’t see it sustain the pandemic. Understandably, a lot of them(including Melvin Capital, Citron Research) began shorting the stock in order to make good fortune.

For starters, short selling is a technique to borrow shares, sell them, and buy them back when it falls. People use this tactic to pocket the difference when a stock seems bearish with no upside possibility in the near term. However, if the stock does reverse and keeps rising, the losses can be unlimited.

Short selling has always been a scummy tactic as it lets the big players manipulate the market, the stock prices and causes small traders to panic sell. Large hedge fund managers use this strategy just so that they can buy back those shares at a lower price.

Citron did this with Palantir by shorting it to a $20 target for the end of 2020 — much to the dismay of WallStreetBets community. By then it was pretty clear that the popular online community(which is well aware that Wall Street investors snoop their discussion boards) would rebel against short selling.

And so, they backed their own meme stock, GME after figuring that it was heavily shorted by some popular capital management firms.

This, coupled with a few positive news such as Chewy’s founder joining GameStop’s board of directors and a promising deal with Microsoft encouraged more retail and institutional investors to collectively buy shares and option calls thereby pumping the stock price.

In the midst of this madness, the short-sellers were running out of time and had only one option: buy more shares in order to cover their losses before they get margin called.

This led to a massive short squeeze like situation. A short squeeze is basically a phenomenon where the short-sellers are forced to hedge their over-exposed positions by purchasing more shares — which in turn creates more upward pressure as the majority of investors are trying to buy thereby causing to skyrocket — and this is exactly what is happening with GME.

At the time of writing, Melvin Capital has alone suffered losses of almost $3 billion within a single trading day while the total net loss of short-sellers has surpassed $6 billion.

To add more fuel to the fire, Elon Musk, who for long has been at loggerheads with Tesla shorters, sent out a single tweet which further propelled the GME stock price in the aftermarket hours — causing greater losses and misery for the big shorters.

GameStop Has Showcased a Change in Stock Market’s Power Game

By now, it’s pretty evident that the stock prices are not only disconnected from the economy but also from the underlying valuation of the company.

When the stock market quickly reversed from the March crash to an all-time high in November there were a lot of narratives floating around.

Some said the market is running on greed while others said we are in a tech bubble that is waiting to burst.

There was also a third angle that suggested the market is in an IPO bubble where only the institutional investors have a chance to double their investments.

The GameStop’s crazy short squeeze has dismissed all such notions and showcased that the stock market is a power struggle game — between the large fund managers and retail traders.

The former has been manipulating the market and driving the stock prices for a while now. But the tables have turned in 2021.

A group of retail day traders only required an internet forum to start the biggest short squeeze in financial history and give short-sellers a taste of their own medicine.

Funnily, it also took a gaming firm for us to realize that the stock market isn’t real. It’s a simulation. A video game that’s rigged and continues to remain inefficient.

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