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GameStop – when 10m Davids took down a Goliath

The buying and selling of cryptocurrencies has created an entire generation of social media-era pundits who are less risk averse, and their agility allows them to manage big swings in the value of their investments.

 

“Hold the line!”

 

This phrase became popular among retail investors on Reddit as a war-cry of sorts. Its purpose was to rally one another and keep each other from selling shares, in a bid to squeeze out the hedge funds who were betting on the demise of their beloved GameStop.

 

GameStop is a listed gaming retailer that has nostalgic value for American males in their 20s and 30s. It’s synonymous with pre-online retail, harking back to the halcyon days when these millennial investors were teens cruising the mall, spending hours scanning shelves for the latest Xbox, Playstation or PC game.

 

GameStop as a business has not kept up with the times. It is a veritable dinosaur, which was on course to face a similar depressing end to that of South African brick-and-mortar music retailer, Musica.

 

But as a brand, GameStop still held a strong position within the hearts of many young retail investors, and when it became clear that certain hedge funds had another plan for the stock – to bet against the price, riding out their short positions as long as they possibly could – these investors took it personally.

 

At one point, over 130% of GameStop’s stock (in other words, more stock than was actually in issue) was held in short positions.

 

The hedge fund strategy was seen as a direct attack on GameStop and what it represented, and in January 2021 the Reddit community started to mobilise. Using a Reddit platform called r/wallstreetbets they began strategising how they could flip the situation on its head, taking back what they felt was being taken away from them. They did this by buying back shares to raise the stock price and ultimately ‘squeeze’ the hedge funds out.

 

But by buying up these shares, the Reddit community figured out not only could they squeeze the hedge funds’ positions until they exited the investment, hitting them where it hurts, but they could also make money as the share price kept rising. And many certainly did. At its peak, over the course of just a few weeks, GameStop made gains of 2 000% And saw at least one major hedge fund face collapse – requiring a bail out by two of its rivals.

 

Reddit’s retail investors took this as a ‘win’ for the underdog. They smelled blood and the revolution was well underway. A meme-led movement quickly gained momentum, a leader-less horde was taking direction from no-one in particular and was ruling over anything that a firm understanding of the fundamentals of the business could provide. And for the period of a few days Wall Street was turned on its head.

 

The share price soared until eventually it hit its ceiling and the sentimentally driven valuations could not be rationally sustained.

 

 

Source: New York Times

 

RobinHood, which was the main channel for investors during the GameStop frenzy, has since been told to pay fines of $70m to the US treasury for a range of contraventions. But despite this, it still holds massive public sway, currently representing a whopping $81bn in total trading assets under management and a much-anticipated IPO planned for later in the year.

 

As Katie Martin, the FT’s Markets Editor asks in this video “How do you open up markets, so they are there for anyone to access? It can’t be fair that only Harry Hedgefund has figured out a way to make money out of markets. It’s got to be possible for everybody to participate – these are public markets.”

 

The extent to which GameStop’s excitement has permanently changed the face of investment still needs to be seen. But it raises interesting questions about the need for regulation of trading platforms and social media

 

For more information about Aprio Digital’s service offering, contact Thomas McLachlan on thomas@aprio.co.za or the team at Aprio Digital on digital@aprio.co.za

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