Explain how Reddit memlords threaten to bankrupt Wall Street’s biggest hedge funds with GameStop stock

Explain how Reddit memlords threaten to bankrupt Wall Street's biggest hedge funds with GameStop stock

Most gamers are not aware of the grand battle that unfolded around the large gaming retailer GameStop, and after all, ten thousand dollars invested on time today could make you a millionaire. 

But let’s start from the very beginning. 

In March 2019, one Reddit user claimed that the stock of the retailer GameStop was actually worth more than it was listed on the stock exchange. Later that year, hedge fund manager Michael Berry (played by Christian Bale in The Big Short and made mountains of money during the 2007 real estate collapse) bought 3% of GameStop when the unit was under $ 5. This led another redditor with the nickname DeepFuckingValue to launch a campaign in favor of the purchase of shares in the company by subscribers of the WallStreetBets subreddit.

In the following April, another redditor with the nickname Senior_Hedgehog noted that GameStop’s shares were one of the most undervalued on the market, and this fact could be exploited. 

And this is where we come to the concept of shorting.

Explain how Reddit memlords threaten to bankrupt Wall Street's biggest hedge funds with GameStop stock

Buying and selling shares is commonplace. You buy at one price, sell at a higher price, and take the difference. Even a child can trade in this way. True, if the share price falls, then in the event of a sale, you find yourself in the red zone. 

Selling short works the opposite way. These traders benefit when the stock price falls.

The fact is that short traders borrow other people’s shares and sell them in order to buy later at a lower price, taking the difference between the original price and the price when buying back.

Roughly speaking, Shepard takes GameStop stock from Jensen and sells it for $ 10. He pays Jensen $ 1 for this, promising to return the shares at a later date. When the stock price drops to $ 5, Shepard buys it at that price. Shepard’s Profit ($ 10- $ 5) – $ 1 = $ 4.

Since this all started. At least one hedge fund has tried to understate GameStop’s stock by playing short. And usually it works, such machinations worked without problems in the past, the managers of these funds were so hungry to make money without doing anything that they were absolutely sure of their victory.

They first downgraded GameStop stock to $ 20, then to $ 10 and to $ 4. Greed continued to weigh on common sense. They have been doing it for months, making billions of dollars and could have led GameStop to bankruptcy.

Explain how Reddit memlords threaten to bankrupt Wall Street's biggest hedge funds with GameStop stock

And then the memlords from the WallStreetBets subreddit took the stage. And someone noticed that hedge funds are understating 140% of the stocks available. In other words, the funds turned out to be so greedy that they borrowed more shares than there was, making it impossible to buy those shares back. 

WallStreetBets started discussing this topic. And since the terms state that the shares must be bought back and returned, ordinary redditors, not millionaires, began buying every GameStop stock they could. In turn, this led to an increase in the value of the share.

Why?

Because within a month or three, hedge funds were required to buy back the shares, at the price for which they are trading. They had no way out.

If a hedge fund borrowed a million shares and sold them for $ 10, it made $ 10 million in net profit. But since the shares need to be returned, you have to buy … but not at $ 5, but at $ 80, $ 150 or even $ 300 – like today. Thus, hedge funds suffered tens and hundreds of millions of dollars in losses due to their greed.

Explain how Reddit memlords threaten to bankrupt Wall Street's biggest hedge funds with GameStop stock

But no, this is “honestly earned” money. Therefore, hedge funds continued to push. They continued to play short because they were confident that they could manipulate the price and save their skins. 

However, all attempts to crash the price have failed. They worked temporarily, but not enough to pull them out of the billion-dollar debt hole. Really. The multi-billion dollar hedge fund Melvin Capital needed a $ 2.8 billion lifeline. 

And this is just one of the funds. It is difficult to say how many of these have bet on a fall and did not expect the pressure of the Memlords, but if the situation continues, then soon we may expect news of the bankruptcy of several large hedge funds at once. For a reason, they ran to the media and social networks, demanding to stop the bidding and complaining that the bad meme lords beat them in their own game. 

Even Elon Musk, the notorious hater of short hedge funds, added fuel to the fire by tweeting “Gamestonk !!” on January 26, which saw GameStop’s stock soar from $ 147 to $ 230.

Many wealthy investors have joined this “game” because the point is that the theoretical losses of hedge funds are endless. Because they are obliged to buy shares at the price they are asked for.

Explain how Reddit memlords threaten to bankrupt Wall Street's biggest hedge funds with GameStop stock

Others just want to watch Wall Street’s golden towers fall under the weight of their own greed. What will happen next is not yet completely clear, but the price has already reached $ 348. Obviously, it is too late to buy GameStop shares now, but one cannot but congratulate the enterprising redditors who became millionaires in a matter of days simply because many months ago they bought shares of the company that were greatly undervalued by hedge funds.

It is unlikely that this will be a lesson for players on the exchange, and hedge funds will not disappear anywhere. The casino continues, it’s just that money changes its owners.

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