![How Reddit Forced GameStop Stocks Up 685 Per Cent For The Memes [Updated]](https://www.kotaku.com.au/wp-content/uploads/2021/01/27/gamestop-drama-reddit-stocks.png?quality=75&w=640&h=360&crop=1)
GameStop shares are going to the moon, largely thanks to the power of Reddit and a ‘meme war’ waged with investors. The game retailer’s stock is up 505 per cent this year, according to the Los Angeles Times, sitting at $US132 after previously trading around $US2-4. So, how did wily Redditors take a retailer that closed hundreds of stores months ago into the stratosphere?
The furore over GameStop kicked off on January 11 when GameStop Corp. (the parent company of EB Games in Australia) announced Chewy Inc. co-founder Ryan Cohen would join its board. Cohen’s investment firm reportedly had nearly a 10 per cent stake in GameStop already, but he wanted to push the company further into the digital sales market. A lack of confidence in Cohen’s tactics and views led stock commenter Citron Research to predict a massive price drop for the company.
Reddit board r/wallstreetbets reportedly took this news in its stride and began a counter-argument that GameStop’s shares were stronger than ever, leading to the growth of an alternate narrative which put inflated faith in the strength of GameStop’s shares.
Naturally the jokes blew out of proportion, and what followed was a buying frenzy that drove the price of GameStop’s shares through the roof as major investors took them as gospel. This saw GameStop’s share prices increase massively. It also meant major losses for short sellers, and a market phenomenon known commonly as a ‘short squeeze’.
In layman’s terms, a short squeeze is a situation where stocks rise rapidly in price beyond the natural factors of the market. In this case, the short squeeze came about thanks to the loud and pervasive commentary from Reddit and Twitter which insisted GameStop was doing fantastically.
It meant anyone who’d bought ‘short stocks’ in the company was suddenly in dire waters.
Short selling is a process where investors purchase or ‘borrow’ stocks from other investors betting they’ll fall lower. Short stock investors will then buy these stocks back at a lower price and give it back to the original investor, leading to a small monetary payoff from this endeavour. It’s a risky business because it’s tough to predict when prices will be at their lowest and therefore return the highest profit.
On Saturday, the short stock trading over GameStop reached such heights the market was forced to briefly pause while it accounted for the sudden interest. This came in all forms: from Redditors having a laugh, legitimate personal investors, but also larger investment firms who’d heard the buzz and wanted a piece of the pie.
While GameStop was previously considered a relatively stable investment for short stockists, the ‘GameStonk’ rush caught short stock investors flat-footed as they became unable to make a profit on their investments. According to the Los Angeles Time, these losses meant hedge fund Melvin Capital Management had to seek a near-$US3 billion ($3.8 billion) bailout this week. Business Insider further reported over $US5 billion ($6.4 billion) had been lost by short-sellers in the squeeze.
As of writing, GameStop’s share price continues to trend upward, with it currently sitting at $US147.98 ($190.85), a 92.61% increase from its previous close. While it does appear to be stabilising after a massive period of inflation, the stable growth is wildly impressive.
In a meme war between Reddit and investors you wouldn’t expect Reddit to come out on top, but here we are, ogling the incredible results of what began as a joke on the internet.
While it’s likely prices will once again plummet, it does raise interesting questions about the volatility of the international share market. Technically, this is a repeatable incident. We can only hope everyone will learn from this experience and never underestimate how powerful the internet can be in the future.
Update 9:04 am AEDT 28/1/21:
As of Thursday morning, GameStop shares have continued to soar, experiencing exponential growth as news of the Reddit-led takeover hit the mainstream press. They now sit at $US347.51 ($453.38), an additional 134.84 per cent increase on the previous day’s close.
The continued growth forced the White House to comment on the situation, with spokeswoman Jen Psaki stating the situation was being closely monitored. It also led to Melvin Capital ‘closing out’ its short position in GameStop due to massive losses, meaning it will no longer invest in the company.
As interest mounts, so does the share price. GameStop is now charting at a 685 per cent increase in January alone, according to CNBC. The rate is currently very unpredictable and while a crash is likely on the way, it’s anyone’s guess when the share price will actually slow down.
For now, it looks like ‘up’ is the only direction GameStop knows.
Update #2, 11:10am AEDT: Tensions between Wall Street and retail investors are likely to escalate, with Discord banning the Wall Street Bets server for “hateful and discriminatory content after repeated warnings” over “the past few months”.
The official subreddit has also been set to private, with a note saying the moderators “unable to ensure Reddit’s content policy and the WSB rules are enforceable without a technology platform that can support automation of this enforcement”.
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