In January, GameStop shares rose more than 1,600% to a little more than $300 a share. The stock had been trading at a 52-week low of $2.57. It looked like hedge funds were going to make a profit, but then Wall Street Bets, a Reddit forum that turned into a decentralized hedge fund overnight, entered the equation and brought these institutional investors to their knees.
An army of Redditors, known for their memes and massive losses over the years, poured into the heavily shorted stock and forced a short squeeze. A short squeeze is when a stock rallies and forces investors, who bet that the asset would decline, to purchase additional shares to avoid higher losses.
Trading platforms, like Robinhood, TD Ameritrade, and Charles Schwab, intervened and placed restrictions on buying these stocks. This raised questions about the legality and ethics behind the decision, but these companies stated that they were trying to protect their customers. U.S. government officials have promised to hold hearings and launch investigations.
A Brief History of Short Squeezes
Elon Musk’s Tesla Motors faced monumental shorts since 2019, only for the company’s shares to surge about 1,000% in 2020. But short sellers are hanging onto their positions, still thinking that the Tesla stock will tank anytime now.
Volkswagen is another automobile company that beat the shorts. The German carmaker faced enormous bearish positions from hedge funds after reports that it was in the process of being purchased by Porsche. In the end, Volkswagen became one of the most lucrative brands in the world, and VW shares had surged to about $1,000 a share. Hedge funds lost approximately $30 billion on the bet.
A Future of Short Squeezes?
Wall Street Bets is currently engaging in a new target: Silver. The WSB community believes that silver is massively undervalued, and the numbers suggest that the market is massively shorting the white metal. After a post on the forum went viral, silver prices jumped, and the various silver-related stocks and exchange-traded funds (ETFs) surged on the news. While they plan to raise silver prices from $25 to $1,000, the odds of that occurring are low.
With GameStop, the hedge funds were not prepared for it. The power players on the New York Stock Exchange are now ready for the Reddit army. A short squeeze will unfold again, but GameStop’s volatility will be hard to rival.
How Social Media Has Forever Changed Things
Thanks to the rise of free and convenient trading outlets, such as Robinhood, a new generation of investors has been born. It used to be that most young people couldn’t afford to invest in stocks. But now young investors are changing the way the game is played by using social media.
It is the meme-loving kids in jeans and t-shirts who are now the primetime players. Stocks can soar or crash based on a meme, a hashtag, or a tweet. Wall Street Bets has highlighted the new way of trading.
Musk added “#bitcoin” to his profile and the value of the cryptocurrency skyrocketed 20% almost immediately. One of the top Twitter trends is “#silvershortsqueeze.” Dogecoin, a relic of the early days of cryptocurrency that was born from a meme, has been rejuvenated because of social media. Will hedge funds adapt to the changing times? They may need to if they hope to stay relevant.
The Federal Reserve Casino
If there is one constant variant in this entire saga, it is the Federal Reserve System. Thanks to the U.S. central bank’s zero-interest-rate-policy (ZIRP) and the trillions that have been pumped into the financial system, this type of trading activity has trickled down to traders buying and selling stocks from the comfort of their homes.