This week was quite eventful for GameStop, an American video game retailer. For the first time in its history, GameStop’s stock (GME) traded on the New York Stock Exchange hit a $470 record on Thursday, up from $18. This happened because a quite large number of Reddit users encouraged each other to make big bets on GME which forced the stock price to an abnormal level and left hedge funds with billions of dollars in collective losses.
GameStop’s business is not doing great lately, so GME has been traded low for the last 6 years. From the expert perspective, this happens due to the outdated business model, as many people buy digital versions of games. The stock price which keeps going down is attractive for short-sellers – investors and hedge funds who sell stock to gain a profit when its value goes down.
Yep. GameStop has become popular among short sellers from Wall Street. Basically, it looks like this: Hedge funds borrow GME from brokers and sell them for X, considering that X will go down, and they will be able to buy GME back for a lower price. Simply put, bought low + sell high = profit! As the GME value became lower and lower, the funds were about to buy 140% of GameStop’s stock back and get their profits. 140% means literally all the GME stocks available on the NYSE.
Reddit users noticed the greedy intentions of the funds and developed a plan to go ahead and buy GME to increase the GME value and get back at the funds. GME started soaring. Some funds started panic buying GME to avoid big losses but it made the value spike. The domino effect has begun and even aroused interest among celebrities. The GME stock resumed the rally.
What about hedge funds?
Many hedge funds faced billion-dollar losses after the Reddit attack. The last and the largest fund, Melvin Capital, gave up and lost near 5 bln dollars. This is how Reddit made American funds collapse.
Markets are panicking and asking regulators to take measures, trading platforms don’t allow to buy the stock, but Redditors don’t seem to stop. New attacks affected Nokia, Blackberry, and other companies appealing for short trades.
As of writing, GameStop’s stock resumed rally and keeps now above $400 in premarket. Apparently, this is a bubble game, and the market correction is inevitable. But when? We’ll see!