GameStop is a wild ride – but it’s no revolution

There are few stories as wild as the sudden surge in GameStop’s stock price. Only two weeks ago, it was priced at $19 before sky rocketing as high as $470 per share. The internet is full of people proclaiming this as some kind of revolution, as if ordinary people are standing up to the establishment. Unfortunately, this is not a social movement, it’s a get-rich-quick scheme.

A little background: GameStop is a business that sells video games and like many businesses based on selling a physical consumer product, it has been hit hard by the rise of online commerce. Why go to a physical building when you can order your games online? The coronavirus lockdown has only made the situation even worse. For this reason, it has been struggling and its share price dropped as low as $2.50 in 2020. Considering this, some investors believed the price would drop even lower, so they started short selling it.

I’ve seen some “explanations” of short selling that make it sound incredibly complicated and leave readers more confused than before. Here’s a simple explanation: short selling is betting the price of a share will go down. There, that was easy, wasn’t it? I’ve seen many people online denounce short selling GameStop as an extremely greedy or manipulative act, or even a plan to drive the business bankrupt and destroy the livelihoods of its employees, but it’s no better or worse than any other trade. This is what investors do, they look at the market and guess whether shares will go up or down in price, and buy or sell accordingly. That’s how capitalism works.

The Reddit forum Wall Street Bets does a lot of the same stuff. Users discuss the market and try to convince others to buy or sell. At the top of the forum is a picture of a luxurious yacht, because that’s the aim – to get rich. For reasons that aren’t entirely clear, many of the forum decided to start buying stocks in GameStop. Maybe some believed the business was under-valued, maybe some thought they could make some money, but most seem to be jumping on the bandwagon because everyone else is. It became a meme and some treat it as an elaborate prank. Yet it proved enormously successful and the price rose over 10-times its initial value in only a week.

There has been a rush of hot takes proclaiming to be some kind of revolution of the masses against the elites, but this is nonsense. I’ve seen a few leftists jump on the train as if this is the next “Occupy Wall Street”, but Wall Street Bets doesn’t want to overthrow the rich, they want to become the rich. The forum might be full of semi-hysterical comments denouncing the greedy rich and claiming the system is rigged, but their main complaint about the system is that they aren’t the ones on the top. They’re not angry that some people have enormous wealth and power, they’re angry it’s not them.

Reading Wall Street Bets reminds me in a way of pro-Trump forums, there’s a similar attitude. Both groups are angry at a rich elite, who are supposedly manipulating a rigged system in their favour, but they don’t know what to do about it. There is a vagueness to their complaints and it easily slides into conspiracy theories. They complain about media manipulation, by which they seem to mean any opinion that conflicts with theirs. They don’t mind if the system is rigged, as long as it is rigged in their favour. Trump denounced the elites but gave massive tax cuts to the rich. Wall Street Bets denounces rich investors, but the main beneficiaries the GameStop surge are those who already held its shares – its 3 largest shareholders alone have gained $2 billion.

Don’t be fooled into thinking Wall Street Bets is comprised of average Joes fighting a rich elite. If you have enough disposable income to make large investments in shares, then you are not on an average income. While this Reddit forum is getting most of the attention, they alone don’t have the resources to have such an influence on the market. It takes serious money to move the market and this can only happen if large investors are behind GameStop. The idea of a couple of ordinary people fighting the financial system makes a great story, but the reality isn’t so clear. I’ll shed no tears for hedge funds losing money, but if you want to redistribute wealth, the stock market is not the way to go. This is a fight between the rich and very rich.

While many are entertained by this meme, the sad fact is that most of the people buying GameStop shares will lose most of their money. It’s become a bubble; the price has surged to extreme highs, but it can’t stay so high. GameStop hasn’t suddenly become more profitable; it still has the same problems it had two weeks ago. Some people will sell early and get rich, but more will be too late and stuck with shares worth a lot less than they paid for them. Even if GameStop settles at a price double what it was before the bubble, that would still be a 90% drop. It might be a fun ride, but it’ll end in tears.

5 thoughts on “GameStop is a wild ride – but it’s no revolution”

  1. Great post. I went back and tested other high short interest stocks in my latest screen, to inject some historical context into the mix for anyone who is interested. Cheers!

  2. “For reasons that aren’t entirely clear, many of the forum decided to start buying stocks in GameStop. ”
    The reasons were entirely clear, GS was shorted to 120% of the actual shares. This meant that no matter how high the price the short sellers would have to buy the shares back from the speculators. That’s because they literally have to buy every share, some of them twice. If you don’t include the shorting being over 100% (thus making it impossible to actually fulfil contracts if the bet against them) and the potential profit from that, you haven’t covered the subject. Why did you bother?

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