As if 2021 wasn’t shaping up to be one of the weirdest years in recent memory, news has emerged that Reddit users have managed to cost Wall Street investors billions of dollars by boosting the stock of US video games retail chain Gamestop.
Confused? Don’t worry — there’s a lot to unpack there.
Thanks to the general drop in physical sales for games over the last year, due in part to the COVID-19 pandemic and in part to the rise of digital sales, Gamestop was not expected to turn a profit until 2023. This made it a rather attractive prospect for a hedge fund called Melvin Capital, who decided to ‘short-sell’ its shares in the retail chain. Essentially this means that it stood to make money if the price in Gamestop shares continued to drop.
The power of Reddit
This was working rather well for Melvin Capital until a group of amateur investors who congregate on the Reddit thread r/wallstreetbets started buying up Gamestop stocks which, in turn, started to inflate its share price. This rise in Gamestop’s stock was given a further boost after Elon Musk sent out a tweet to his 42 million followers about what was happening.
By Wednesday this week, according to The Guardian, Gamestop’s stock stood at $347 a share and this had caused such a stir it prompted the White House to announce it was monitoring the situation closely. To put this into some perspective, at its low point last year, Gamestop stock was valued at around $6.
What this all means is that, thanks to the r/wallstreetbets crew and a few other investors who took note of what was happening and followed their lead, a lot of very wealthy people on Wall Street have lost an awful lot of money.
According to a report on The Independent (UK), hedge funds who piled into short Gamestop stocks have collectively lost around $5 billion and Melvin Capital was forced to close its position on Tuesday after its backers had been forced to push $3 billion into the fund to keep it going.
In turn, the situation has prompted a lot of debate about the ethicality and legality of amateur investors inflating stock to make a quick buck. This may seem rather bizarre to Wall Street outsiders, who have seen hedge funds make money off shorting loads of entities, including retail chains and sub-prime mortgages.