Social Media is more powerful than we thought

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By Jevan Soyer. If 2020 was not bad enough, 2021 just made the internet a whole lot weirder especially with social media. The average person does not follow the stock market for one out of two reasons. Well, I don’t follow the stock market for two reasons.

Firstly, I am poor and secondly, and I cannot stress this enough, it is boring. Some of us poor people have change the way the stock market works forever and it is all through the strength in numbers through social media. This has been demonstrated by the collective activities of the members of a Reddit group.

How an investor could profit

I know your time is valuable so here is the short version of this very funny story. Now, this is funny to me because I have no money invested in it, but there are are a handful of people who will not find it funny in the least.

The villain in this story is a hedge fund called Melvin Capital. It penned an article stating a play by play on how an investor could profit on the inevitable demise of GameStop. It is predicted that the video game retailer is on the verge of collapse since most gamers have migrated to digital downloads. Also, the pandemic has made it almost necessary to purchase online whenever possible.

The plan was to short-sell GameStop stock. To put it simply, short-selling is essentially gambling that a stock’s price will drop. If it does, you make money. If it doesn’t, you end up paying out money for however much it goes up.

Under normal circumstances this would have gone according to plan, as it has hundreds if not thousands of times before. These are not normal times, and with this we introduce the heroes of this story.

Social Media group did not like this

An obscure Subreddit named Wall Street Bets (WSB) that refers to themselves as degenerates did not like this at all. Just to be clear this is not an organised group, just some like-minded individuals who share a common interest, stocks. Individuals will regularly gamble their life-savings on a single trade, some just look on and others speculate. At the time of this article, WSB was consisted of 8.7 million degenerates.

Some stocks are coveted more than others and are referred to as “meme stocks”. These companies hold a special place in the heart of WSB. Tesla is one, as is AMD and GameStop is also a “Meme Stock“. So the actions of Melvin Capital did not sit well with a few members of WSB. This was the beginning of the most insane chain of events for the year thus far.

In an attempt to save their beloved GameStop, WSB decided to do a “Short Squeeze”. This is when you see people trying to short a stock, so you buy up that stock, or as in the case here you get a bunch of other people to buy up that stock. With each purchase the price actually goes up. Since Melvin Capital was trying to short the stock at a price of $20 per share, WSB wanted to get it as high above that price as possible. Over $300 per share at one point.

This means Melvin has to cover over $280 per share that they bought. This came out to billions. Melvin Capital, over night, was suddenly facing bankruptcy.

Traditional traders seem not to be impressed with recent events. Point72, another hedge fund, teamed up with a few other little funds, and they injected around 3 billion into Melvin Capital to keep them from spiraling. Essentially, this meant the billionaire hedge fund crew were banding together to fight back against Wall Street Bets. And WSB just said, “Okay, no problem.”

WSB is just a social media group

Melvin Capital lost the 3 billion they were given. It’s gone. Point72 individual contribution to the bail out was a little over a billion, and that means that the fund dropped from 17 billion to 16 billion. It means that in less than 24 hours, WSB managed to ensure one hedge fund will die and drop the value of another by at least 6%.

Remember, WSB is just a group of like-minded people connected to each other by social media. They are not hedge fund guys, day traders, millionaires or billionaires. This is being done by everyday people with a phone app coordinating to ruin billionaires’ lives because they can.

New to everyone like the pandemic

The owners and shareholders are at this point crying foul and asking for financial regulators to step in. If roles were reversed this would not be the case, it would just be a situation of that is how the world works. Everything that they have done to this point have only made their situation worse, and this could just be a precedent and GameStop chapter one in the fall of Wall Street as we know it.

The members of WSB are are trying to hold the line, not sell their shares and do as much damage. Constant media coverage has acted as free advertising and anyone who would like to use this opportunity to humble the rich has a group to join.

No one knows what the long term effects of this GameStop situation is going to be, and if this would have a happy ending. Just like the current pandemic it is new to everyone. This may also just be mass hysteria sensationalised media outlets or it could be what brings about the next financial crash as activist investors team up to save companies and the ripple effects cause havoc on the market.