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Why Everyone Is Talking About GameStop Stocks — Or Is It Stonks?

Whizy Kim
Last Updated 28 January 2021, 10:24
Photo: Michael Nagle/Bloomberg/Getty Images.
Right now, Wall Street is in chaos — and it's all thanks to Reddit and GameStop, a video game retailer that people visited in the early 2000s and feel as nostalgic toward as you do Blockbuster. Despite the chain feeling like the remnant of a bygone era, in the last two weeks, GameStop stock soared almost 700%. First, this past Friday, it had increased by 83% since prices first started rising. Then, on Monday, it rose another 140% and surged again this morning, seemingly in part because Elon Musk tweeted "Gamestonk!!" late yesterday afternoon. How high has it gone? On December 31, 2020, a share of GameStop stock cost $18.84 (£13.80). At time of writing, a share is over $300 (£219.80). The company is now worth over $10 billion (£7.3 billion).
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So the $10 billion question is, why? GameStop didn't announce some wild new innovation, like that it had figured out how to get everyone in the world addicted to gaming using microwaves. It's a mostly brick-and-mortar operation that has closed thousands of stores in the past several years as more people buy digital copies of games.
Instead, this stock surge was driven by redditors from r/WallStreetBets, where day traders play the stock market, literally — shitposting and memeing like it's all just a game. When huge numbers of WallStreetBets traders (which boasts over 3 million subscribers now) started buying up GameStop shares, the price skyrocketed.
WSB traders sometimes make what they call "YOLO" buys; even if it ends in a loss, you'll gain internet cred for being bold and entertaining. But the GameStop surge wasn't just for entertainment — an important piece of it was to target short-sellers. Short-selling is the opposite of what most people are doing in the stock market — trying to buy low and sell high. Short-sellers bet on the price of a stock falling. This is basically what happens: Step one, borrow shares from someone else. Step two, sell them right away. Step three, wait for the stock price to drop and buy the same number of shares you borrowed. Step four, return the borrowed shares and make a profit from the difference in price.
Some believe that short-sellers serve as a check against stock prices being too high for no good reason. Others, however, believe it's scummy behaviour, and that it encourages profiting off others' failures — and there have been plenty of instances where short-sellers have been accused of manipulating stock values to ensure that they profit. You might also recognize the practice from the 2008 subprime mortgage crisis, in which some hedge funds were short-selling irresponsibly bundled debts.
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GameStop was an extremely shorted stock, given that the heyday of buying video games in a physical store is long past. That is, until Reddit stepped in and said, "Nah." Today, two major GameStop short-sellers, Citron Research and Melvin Capital, announced that they were giving up their GameStop short sell positions at a loss. It's worth noting, though, that WSB redditors think Citron Research and Melvin Capital are lying about abandoning their position, in hopes that this fake-out will convince people to start selling GameStop shares again.
Like so much else in the past year, this weird internet moment is a battle of power between individuals and big institutions. The WSB redditors are mostly "retail traders" — individuals trading from their homes, probably in their PJs — while short-sellers are mostly a part of bigger firms made up of professional traders. It's a controversy that may highlight Wall Street's hypocrisy as well. What WSB is doing isn't obviously illegal, in that institutional traders have done similar things. Yet suddenly, Wall Street is panicking and saying that what WSB has done is dangerous and that now, new rules need to be instituted. If the SEC steps in to impose fines on redditors, it would be pretty unprecedented, according to Bloomberg columnist Matt Levine. In a way, the GameStop short squeeze is about something purer than profit or lolz: giving the middle finger to big finance. One of the WSB subreddit's rules is "no political bullshit," but it's hard to deny that there's something very political about this fight.
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The saga is also further unravelling the notion that stock values are always rational. In other words, average Americans who aren't directly invested in the stock market (which is the majority of people) are once again asking if stocks — or, "stonks" — are, in fact, fake. Especially throughout the pandemic, breathless reports of how healthy the markets are — and therefore, the economy — have stood in stark contrast to the reality of the millions who are still unemployed and struggling to make ends meet. The fact that most people aren't invested in stocks beyond what's in their retirement funds and the fact that many people increasingly feel like pawns taken advantage of by Wall Street contribute to the air of glee around GameStop's soar. Not only will it probably not affect most of us, those it does affect are big financial institutions that people feel a lot of resentment toward. The memes and irreverent takes are endless:
For now, WSB is urging traders to continue holding their GameStop shares instead of selling. AMC and Blackberry stocks, which are also heavily shorted, are currently on the rise too — even Blockbuster stock is rallying. So far, short-sellers have reportedly lost over $5 billion (£3.6 million) thanks to Reddit's GameStop play. Turns out, our parents were right — video games can cause violence. At least in the stock market.
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