In this article, we will tell you a story about the power of decentralisation. This one is about how a bunch of bold redditors united in the subreddit WallStreetBets and won in a finance game against Wall Street hedge funds and made conventional finance laws look futile.
A few words about WallStreetBets
WallStreetBets is a subreddit, which says in its description that it is like if 4chan people found a Bloomberg terminal. The audience of WallStreetBets primarily consists of inexperienced retail traders who decided to go against high-profile hedge funds and make a “quick squeeze” on a stock of an ailing company GameStop that sells video games on CDs. And they actually won.
During the rocketing price surge of GameStop shares ignited by redditors, banks and Wall Street hedge funds which were selling Gamestop shares big time due to the company’s lacklustre financial performance had to counterbuy them to cover their short positions, adding to their price growth.
Shortly after the GameStop pump went viral, Elon Musk tweeted “Gamestonk!!” to his 43-million Twitter audience and added the link to the Wall Street Bets subreddit on January 27. Bloomberg reported that there were nine trading halts of GameStop during the price surge.
The storyline of Gamestop Pump
GameStock market capitalisation was at around $300 million in April 2020, and the company was trying to make both ends meet, with a prospect of profits seen as distant as in 2023. Then Dr. Michael Burry wrote a letter to GameStop’s board of directors, urging them to buy back about half of GameStop shares, using their $300-million buyback authorisation. At that time, the GME price per share was between $2 and $4.
And GameStop got going when John Ryan, the founder of Chewy, joined the stock as an investor. Then WallStreetBets members began to see a massive gain opportunity in this heavily shorted stock by collectively realising a “quick squeeze”. They were trying to execute their move for months but started to have success in January 2021.
As the month of January 2021 went on, GameStop shares (NYSE: GME) were rising consistently. Buying pressure increased on January 22 as famous investor Chamath Palihapitiya bought into GameStop and accelerated the squeeze, and the GameStop stock began to explode on January 26,reaching $150. On 27th and 28th of January, GameStop shares were fluctuating wildly, adding and losing over $100 during the day, and after hitting an all-time high of $483 plummeted below $200.
And WallStreetBets received a humorous prime listing on CoinMarketCap above Bitcoin. Apparently, they were hailed as paragons of decentralisation.
Thus, GameStop shares rose by 2,542% in January, its market capitalisation briefly reaching $14 billion, and amature traders became millionaires, while high-profile hedge funds lost billions of USD. Melvin Capital – one of the top-performing Wall Street hedge funds with $12,5 billion under management as of the start of 2021 – was 30% down at the end of January due to its large selling position in GME. It even had to request a bailout from Citadel LLC and Point72 Asset Management of $2.75 billion to stay afloat.
To hail this epic display of the power of decentralised effort, CoinMarketCap gave WallStreetBets a humorous prime listing above Bitcoin. Apparently, they were hailed as paragons of decentralisation.
In the morning of January 28, Robinhood halted buying for GameStop, AMC, Nokia and BlackBerry, sending an email to its customers that said that those stocks were position-closing only due to high market volatility. In response, the users of Robinhood mobile trading platform instantly directed their ire at the broker, going out with protests against Robinhood to Wall Street and its headquarters in Silicon Valley. Also, the Robinhood mobile app ranking quickly fell from 5 to 1 in Google Play and App Store, with people going full-out-war on Robinhood in Twitter with a hashtag #BoycottRobinhood.
What Happened to Dogecoin
After GameStop trading became position-closing only in Robinhood, WallStreetBets switched over to Dogecoin in response to Elon Musk’s message of help who has got a reputation of a Dogecoin supporter with his lasting history of tweets and rhetoric praising Dogecoin.
The Dogecoin pump began on January 28, as DOGE/USD was growing by almost 400% during the day and closed 384% above the open. On January 29, the pump continued as DOGE/USD rose to above 0.6 from the open at 0.007 on January 28.
After a correction to 0.25 on January 30, the pair continued rocketing and rose above 0.75 on February 8 alongside Tesla’s Bitcoin $1.5-billion buy-in. Eventually, Dogecoin reached an all-time high of $0.84 on February 10 and added over 1,100% to its price since 28th January.
What It Means
This was a very rare case of how low-profile retail investors, many of whom were largely inexperienced, brought market makers to their knees. It normally happens otherwise in almost 100% of cases: the market maker moves the price of a stock one way and the other, liquidating positions of retail traders. This time it was different and cost market makers dearly.
And this example brilliantly showed how the power of decentralised effort of multitudes can change things big time even in a clash with financial giants.
The content of this article is for informational purposes only and should not be construed as investment advice. We ask you to do your research.
