GameStop Stops

The Reddit-fueled hype cycle around GameStop (GME) has moved at such a rapid pace that it’s difficult to write about the phenomenon. Unless you’ve been living under a rock the last week, you know the basics of what happened — a bunch of meme-wielding Reddit users (one named DFV, in particular) hyped GME on the Wall Street Bets sub-Reddit, driving up the price to astronomical levels and sticking it to the billionaire hedge funds who had short positions on the stock.

The share price of GME rocketed (🚀🚀🚀🚀 in Reddit parlance) from under $20 when the frenzy began on January 12 to a nose-bleed-inducing peak of $468 on January 28 — more than a 20X increase in two weeks, most of it in two days. Day traders sent screen shots of their RobinHood accounts showing the millions they had made as they posted doctored videos and caps-laden messages to HOLD! All was great in the world until RobinHood froze buying of the stock, fearing its own liquidity crisis and causing everyone from Ted Cruz to Alexandria Ocasio-Cortez to cry foul and demand investigations. This was the Davids going after the Goliaths, after all.

Share price of GameStop (GME) over the last month, as of 2:35 PM Eastern, 2/2/21

You’ll never guess what happened next. The market did what markets do, and corrected — violently. As of this writing, GME shares have plunged to under $100 in essentially two days. The stock is down over 50% just today, likely on its way back down to the $20 range. Yet, the believers on the WSB sub-Reddit are just as adamant:

“THE DIP IS FAKE. LOOK AT HOW MANY PEOPLE ARE BUYING COMPARED TO SELLING. RELAX AND HOLD”

“Massive ladder attack going on! Do not sell! I repeat do NOT sell!! They’re not allowing us to buy, so that they can continue pressuring the price down! This is their last attempt to get out of this! Hold the line!!”

This entire phenomenon reveals the flawed understanding most of us have about the stock market. As retail investors, we perceive the price as just the price, set by NASDAQ or NYSE. The reality is, like any market, the price is determined by supply and demand. Every sale of shares requires two things: a buyer and a seller. Both think they are getting a good deal. The “price” only represents an approximation of what market-clearing number those two parties might be willing to pay. As deeply appealing as the story of sticking it to the man may be, the reality is “the man” is usually on both sides of the transaction. While there were billionaire hedge fund managers who lost big on their short positions when shares of GME went up, there were other billionaire long sellers who rode (and encouraged) the run-up to profit enormously.

Meanwhile, lots of retail investors got ground in the gears. All the “stonk” bros who bought early and posted Star Wars memes, and screen shots of their “tendies” in their RobinHood accounts, and diamond + hand emojis ✋💎🤚 to HOLD eventually want to get their money out. Many probably sold to the “sheeple” who dutifully bought at $300+ and are watching the share price plunge. Many people riding this speculative wave will make money, and just as many will lose money. There will be winners among the retail investors with $200 in their RobinHood account, and losers. There will be losers among the billionaire hedge fund managers, and winners.

If nothing else, hopefully a generation who has been introduced to investing as if it’s a gambling app on their phone will start to recognize that memes and emoticons are not a sound investment strategy.