Crypto Global

A powerful new front against Wall Street

Feb 2, 2021

Wallstreetbets seems to have grown strong enough with the power of market makers, algo traders, hedge funds, margins, options traders and passive investment bubbles. In this article we would like to introduce you to Wallstreetbets, which is part of Reddit. Reddit is a social media platform that is similar to online forums.

Within Reddit there are many sub-communities or subreddits with topics like technology, science, finance, relationships, etc. The catch with Reddit is that you can't advertise yourself and that is what makes Reddit so interesting. The platform is ad-free, but full of funny memes. But arguably one of the most famous finance subreddits is one called Wallstreetbets. Like every other subreddit, it also has its own language, which is pretty funny. They call themselves autistic or degenerates who are basically people who are terrible at doing stock deals, which by their standards is admittedly 95% of people.

What happened last week was crazy. Retail investors have been able to outsmart institutional investors and billionaires, and that doesn't happen very often. When it comes to traditional finance and investing, we are told to manage our investments in terms of risk / return. For example, most of our money should go to index funds, followed by a few individual stocks, and finally possibly having alternative investments such as cryptocurrencies. Last week the hierarchy was completely reversed. Even Elon Musk tweeted about ‘Gamestonk’, which of course increased the price and the Wallstreetbet subreddit community by millions of people who in some way created their own hedge fund of private investors. What exactly happened to Gamestop this year? And why this story could change the future of investing.

Whenever a company's stock price rises it may be due to a good quarterly earnings report or good sales growth, but none of that happened to Gamestop. Instead, it was due to ‘classic exploitation’, in which some investors bet on a falling share price. What other investors realized, however, was that if they bought enough of this Gamestop stock, it would force these short sellers (the people who bet on falling prices) to cover their positions by buying more of that stock from the same people that they had borrowed. And because there was such a tight supply of this stock on the market, the price skyrocketed. This loop was repeated over and over again, increasing the price again.

Something even more interesting happened behind the scenes. It was the institutional investors versus the private investors: and for the first time we saw private investors win on such a public level. Hedge funds have been the clear winners in the market for a long time since the beginning of history. They have so much money that regardless of where they move their money and what stocks they buy, in some cases it was enough to move the price of a stock significantly, which could also be argued as price manipulation, no different from that what we saw from Wallstreetbets last week. In some cases, hedge funds have so much money that they can destroy an entire company.

One way to do this is through what is known as an LBO, which is a leveraged buyout. Hedge funds use their money to buy up an entire company and all of its stocks. And then because it's their company, they'll take the debt they used to buy that company, and then immediately throw that debt back on the company they just bought. And this forces the company to then sell its assets, which at Gamestop would mean selling its games, selling its real estate, laying off its employees, etc. And the savings they make of it to stay afloat and to stay in business, go straight to the hedge funds. However, when the hedge fund lets its company go bankrupt, the structure of the business units means that they do not owe a single amount as that debt is technically not part of the hedge fund. The liability rests with this other company. They put their debts off because they are an entity apart from them. Using this method, people have lost millions of jobs at world-famous companies in the last 10 years alone.

Retail investors with much less money are realizing for the first time that one can get those short positions out of these hedge funds by joining forces through numerical strength. The private investors examined which of these stocks were the most heavily shortened and which had the largest or the lowest float. Float means how many shares are outstanding in the market to be traded. One of the reasons Gamestop did so well is because more stocks were shorted in this stock than there were in the market for borrowing. Of course, the people who owned this stock could ask for a premium. This forces these hedge funds to spend more money to cover their positions. In short, retail investors used a classic Wall Street tactic that hedge funds use against each other. Companies like Melvin Capital and Citron, both of which have lost more than $5 billion at the time. Hedge funds lost so much money that they now need a bailout and a cash injection from their investors. During this battle between retail and institutional investors, Nasdaq decided to ban Gamestop's stock purchases. All exchange trading platforms, including Robin Hood, have stopped allowing people to buy these stocks.

After Gamestop, the Reddit community had chosen a new price target last week: Dogecoin. The price has risen by over 500% within 24 hours and even increased tenfold in one phase and added the cryptocurrency to the list of the top 10 crypto assets according to market capitalization. By the way: Dogecoin doesn't do anything special. It has a cute dog as a logo. Its founder gave up the project a long time ago. Years ago, some people hyped it as a joke that then became part of its narrative - in other words, its unpretentious lack of basics has become part of its worth.