Revenge of the Nerds: What happened to Wallstreet?

If you haven’t heard Gamestop has suddenly been saved by an enormous amount of cash that has fallen right onto their laps. Now the question becomes, what does the price of Gamestop’s stock mean for the financial systems we have in place right now?

Let’s go ahead and explain what happened, and like most things that happen on the internet, it all starts with Reddit.

If you’re unaware of Reddit then you’re honestly missing out on an amazing hive mind of knowledge that’s unlike anything I’ve ever seen in my life.

Nonetheless… Enter, the subreddit. A subreddit is like a Facebook group on steroids. You find that subreddit with that niche you’re interested in, and boom you have access to a plethora of information from other experts as well as others like you who are trying to learn.

There is one particular subreddit called WallStreetBets where they discuss stock trading. A few months ago a user on that sub felt that Gamestop was extremely undervalued and mentioned that buying into it was a good idea. He got a lot of pushback at the time because Gamestop seemed dead in the water to so many people.

But this is what he discovered.

Hedge Funds had vastly over sold Gamestop’s stock and were getting really greedy on their short position. Before we can continue on you’re going to need to understand what a hedge fund is and what things it can legally do.

A hedge fund is a pool of big money investors with millions of dollars to throw around. If a manager creates a hedge fund they can basically do anything they want with the money. Invest in stocks, bonds, gold, businesses, race horses… you name it. If they think there’s a profit to be made they can use their funds to do whatever they want with it.

One of the things they can do is called, shorting. In investing you can long something (this means you invest thinking that the price will go up) Or you can short something, which means you are essentially borrowing stock to sell it, because you think the price is going to go down, and you will buy back the stock at a later date, at a cheaper price hopefully, and make the profits off that.

An example would be this. Let’s say Destiny 2 just came out and everyone is buying it. The game sells out in stores. I take your copy of Destiny 2 and sell it, but I promise in a few months I will get you back a copy of Destiny 2. 

I end up selling your copy for $45. Then two months later I suddenly see that all the copies of Destiny 2 are now selling for $2. I buy it for 2 dollars, give you back your Destiny 2 copy, and voila! I profited 43 bucks. 

The one thing you need to understand is that when I shorted that copy of Destiny 2, I made a promise that I will return a copy of Destiny 2 back to you after a certain amount of time, no matter what.

Hedge Funds find companies they think are vulnerable, and with their millions of dollars, drive their stock price straight into the ground, and the hedge funds make a profit. 

This Redditor saw that the Hedge Funds were driving down the price of Gamestop for no reason other than people were scared.

It makes sense though, It’s Gamestop. The way of the disc is dead. Long live downloadable content! 

Well, this Redditor saw that Gamestop sees the writing on the wall and was actually making very good moves in hopes of keeping the company afloat and transitioning for the future.

This Redditor also noticed a potential avalanche happening. All it would take is a small jump in price, and the stock would skyrocket.

The Hedge Funds had shorted this stock so much, they actually shorted 40% more stock than there is in existence! How? Well like I said before. Hedge Funds can do ANYTHING they want with their money, that includes making deals with other people who are willing to take on their bets even if the bet they are making doesn’t even exist. 

For example, if a hedge fund wanted to make an insurance policy for 20 million dollars on Bigfoot’s life, anyone who is willing to say yes to it, can make a Bigfoot life insurance policy for them.

This is also what happened in 2008, when several hedge funds discovered that there was about to be a housing collapse and they bet against all the housing loans getting paid back. Watch The Big Short. It’s an amazing film.

What happened with Gamestop was essentially “The Big Long”. 

So… just to put all this together for a moment. A Redditor, saw that Hedge Funds were over selling Gamestop stock, and notified everyone on Reddit that if the price were to rise up just a little bit, it would trigger a string of trades, that would drive up the price dramatically… but there was still one problem.

Who was going to drive up that price? Was it worth it to do so? Enter WallStreetBets. 

WallStreetBets also had a discord for further discussions on trades. Over the past few months they decided collectively that they all wanted to buy Gamestop stock in hopes of driving up that price. They did this for at least one of two reasons, if not both.

1. If this was true, there would be lots of profits to be made.
2. This would really screw over actual Wall Street Hedge Funds, that screw over the regular working class… like us… all the time… and they liked the sound of that.

 It was a huge win win in their eyes.

It worked. They bought as much as they could, not all at once, but over the past month and a half (which for the stock market is definitely fast) they drove that price up.

Then a few days ago, that price they were looking for, hit. It seems like that price was about 40 dollars according to the chart I read.

Once the price hit that mark, it triggered 3 things.

1. It forced a lot of hedge funds to close out their shorting position. In other words, that 140% of stock that they owed, now needed to be bought back. Forcing the price to jump high.
2. In addition to that, the average investor, like you and me, started noticing, and buying more stock…
3. The Hedge Funds that weren’t paying attention were now on the hook for millions, if not billions, and needed to buy more stock to pay back what they had shorted. Which then continued to drive the price up extremely high.

Now, what does this mean for you and I?

If you’ve been paying attention to our financial system, it reveals nothing because you have known how corrupt it is. It’s constantly in favor of the rich. 

For those who didn’t know, well this was pretty much catching Hedge Funds red handed because as a result of the price hike, Hedge Funds were going crazy, and panicking. 

They were calling this illegal!… It isn’t. 

So since the law wasn’t on their side, they went directly to the institutions who sell stock to regular consumers begging them not to allow anyone to buy this stock anymore. 

Robinhood, a very popular trading platform for novice investors, listened. They stopped allowing people to buy Gamestop, they could only sell. Thus allowing these big hedge funds, to buy back at lower prices.

Now this IS actually illegal. The SEC will be investigating Robinhood and why they allowed this to happen. Robinhood just released a statement saying they had to do this because of SEC regulations they are under. Not because Hedge Funds told them to do so. 

So what should we be paying attention to?

What we need to look at, very closely, is how the government responds to this. This is going to be a possible battle for us.

These Hedge Funds could very well cry “boo hoo” to the government and ask them for a bailout that comes directly out of our pockets and the government may very well do that.

The government could let Robinhood off the hook for market manipulation, which means they’re allowing this financial institution to screw you over whenever they feel like, with no protection for you or your future.

Or they could do what’s right by forcing these hedge funds to pay up, and bring action to Robinhood.

Time will tell, but one thing is for sure. Something needs to change.