We’ve seen the meteoric rise of altcoins and their emperor, the bitcoin. We’ve seen tremendous engagement and value locked in DeFi protocols. But we haven’t yet seen the true power of the people that drove an asset class all the way up. We are referring to Gamestop stock that has seen phenomenal growth and caused hefty losses to some institutions. This event has become such huge news that Wall Street to the Washington Post, everyone is talking and tweeting about it.
GameStop, the world’s largest video game and entertainment software retailer has become the highest trading stock in the US. Thanks to a syndicate of Redditors, the once frail GME stock is now trading at an all-time high with an insane ROI of ~8,181% in one year. Headquartered in Grapevine, Texas, the United States, Gamestop’s stocks were underperforming over the years, and its market strength exacerbated due to the Covid pandemic.
The ‘Reddit Retailer Revolt’
Led by a user DeepFuckingValue (who had put in a $50K bet on GME in options in 2019), users in the r/WallStreetBets subreddit started analyzing GameStop stock and concluded that its price was undervalued. This was due to the weakness in strategies of several giant hedge funds that had bet millions of dollars that Gamestop would eventually fail and began shorting. These Reddit members started purchasing a large number of GameStop stock at low prices, then kept buying more as the prices surged. They still hold the stock which is triggering a phenomenon known as Short Squeeze. The price is rallying and draining these hedge funds as they had bet on the opposite.
Funny isn’t it? And why not? It seems that even billion-dollar corporations cannot undermine the power that lies in the hands of the retailers. And Melvin Capital seems to have been hit by a wrecking ball here.
Not everyone took a blow to their investment though
Ryan Cohen, GameStop’s largest single shareholder held 13% stakes and made a profit of $1.3bn. Cohen’s net worth rose an average $90mn a day, or almost $4m per hour as GME kept surging. Another profiteer Donald Foss, the CEO of Credit Acceptance Corp (auto lender) bought 5% of GME last year for ~12mn and his share is now worth more than $500mn. George Sherman, CEO of GameStop had 3.4% stakes in the company which is now worth ~$350mn. Blackrock, the world’s largest asset manager with $8.67 trillion under management owns 9.2mn shares in GameStop, which now amount to $3bn after this rally.
The orchestrated targeting of fund’s positions made GME surge
The Redditors have represented that they can turn the course of almost anything if they invest enough time. These guys are diamond handling (holding) the stocks and urging other users to hold on tight. Gamestop, on the other hand, has been losing grounds against giants such as Sony, Microsoft, Nintendo, etc. and the recent rally has helped its stock reach a value of $24.24bn on Jan 28 2020. The corporation registered a revenue of US$6.466 billion (2020) $1.8bn less than what it generated in 2019. In fact, the company has made figures way above the $7bn threshold for 11 years straight (2008-2019). It is quite fascinating to see GME skyrocket even if the revenue was quite less this year.
Short Squeeze inflicted a heavy blow on wall Street
Short Squeeze happens when an asset jumps sharply upwards, forcing traders with put positions to buy the stock in order to prevent substantial losses. Now as more purchases occur, the frenzy accelerates the asset’s price even faster. The Put Options work in a way that the contract buyer is betting that the price of a security will fall. A perfect example of a short squeeze is the performance of Tesla stocks in 2020. Tesla has been the most shorted stock in the US exchanges in 2020. More than 18% of its stocks were in short positions, and as a consequence, short-sellers lost $8bn thereby increasing Tesla stock to unprecedented highs.
Melvin Capital Management (with an AUM of $12.5bn as of Jan 2021, and also one of the largest GME position holder), bought a ~$55 million put options (short position) in GME, and it was a heavily leveraged position. Now in the case of GME, the stock is rising tremendously, anybody with a put contract is susceptible to lose a significant amount if the contract expires. According to Melvin’s spokesman, the firm has closed its position on GameStop. That means Melvin Capital has suffered potential losses since they have been holding their short position firmly. They could have prevented the losses if they had bet the other way around.
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