_edited.png)
First things first, you need to understand why we are here today. That starts with the basics of what short selling is...
Short selling is a trading strategy where investors borrow shares of a stock they believe will decrease in value, sell them at the current market price, and aim to buy them back later at a lower price. The difference between the selling price and the buying price is the profit. If the stock price rises instead of falling, short sellers face potentially unlimited losses, as they will have to buy back the shares at a higher price than they sold them for.
In 2020, an investor by the name of Roaring Kitty revealed that GameStop stock was highly shorted. This means many organizations had “borrowed” GameStop shares, and “sold them short” - expecting to buy back the shares they had borrowed at a cheaper rate once the price of the stock fell.
This legal practice is called “short selling”. But some players were so confident that GameStop would go bankrupt, they began illegally “naked short selling” - which means selling fake shares into the system, believing they would never need to “buy them back” ...
Unfortunately for "shorts", GameStop didn’t go bankrupt. In fact, it took on new leadership and began a remarkable transformation. And in January 2021, the price began to soar as individual investors realised there were more shares floating around the marketplace than actually existed.
A short squeeze nearly happened...
This is when the price gets so high that “short sellers” are forced to buy back the shares they owe - including the fake shares. In GameStop's case, it peaked at $483 USD/share. This short squeeze was halted, when brokers and trading apps like Robin Hood took instructions from one of the biggest short-selling culprits, Citadel, and temporarily banned investors from buying the stock, which would have driven the price up even more.
To this day, the price of GameStop has continued to wobble downwards in price as large hedge funds and short sellers continue to try and delay the inevitable, while individual investors continue to buy more and more shares, knowing that eventually the price will rocket.
"As it stands, predictions of the short squeeze potential range from $10,000 per share, to $100million per share - with evidence suggesting there is no theoretical ceiling on what the price could climb to."
The GameStop events, often referred to as the "GameStop short squeeze," span from 2019 to the present and involve a complex series of financial manoeuvres, market dynamics, and social media influence that culminated in a dramatic stock market phenomenon.
Gamestop 2019-2020: The Background
GameStop, a brick-and-mortar video game retailer, had been struggling for years due to the rise of digital game distribution and competition from online retailers. By 2019, its stock price had significantly declined, reflecting its poor financial health and the market's expectation of further decline.
Gamestop Mid-2020: The Spark
In mid-2020, several factors began to converge that would set the stage for the short squeeze. Firstly, Ryan Cohen, co-founder of the pet e-commerce company Chewy, purchased a significant stake in GameStop and joined its board. This move was perceived positively by some investors who believed Cohen could help turn the company around by steering it towards a more digital and e-commerce-focused future.
Social Media Influence Around Gamestop
Around the same time, discussions about GameStop began to gain traction on the subreddit r/WallStreetBets. This online community of retail investors often discusses high-risk, high-reward trades. Some members noticed that GameStop was heavily shorted by institutional investors, with short interest (the percentage of a company's shares that are being shorted) exceeding 100% of its total shares available for trading. This high short interest indicated that there was a significant bet against GameStop’s future success.
Gamestop Late 2020: Momentum Builds
As more users on r/WallStreetBets started to buy GameStop shares and call options (which provide the right to purchase shares at a set price before a certain date), the stock price began to rise. This increase put pressure on short sellers, who started to experience losses. To mitigate these losses, some short sellers began buying shares to cover their positions, which pushed the stock price even higher—a phenomenon known as a "short squeeze."
Gamestop January 2021: The Explosion
By January 2021, the situation reached a tipping point. The stock price skyrocketed from around $20 at the beginning of the month to an intraday high of $483 on January 28, 2021. This dramatic increase was fuelled by a combination of retail investors from r/WallStreetBets and other social media platforms, a gamma ramp of option calls, and algorithmic trading systems reacting to the rapid volatile price movements.
The short squeeze caused massive losses for some hedge funds and institutional investors who had heavily shorted GameStop. One notable example was Melvin Capital, which required a $2.75 billion cash infusion from other hedge funds to stabilize after its short positions resulted in substantial losses.
Aftermath and Regulation
The unprecedented volatility led to several trading platforms, most notably Robinhood, temporarily restricting the buying of GameStop shares. This decision sparked outrage among retail investors and led to accusations of market manipulation and favouritism towards institutional investors. The events prompted congressional hearings and discussions about market regulation and the influence of social media on financial markets.
Gamestop Present Day
Since the peak of what this community calls a sneeze, GameStop’s stock price has significantly declined from its January 2021 highs but remains above its pre-squeeze levels. The company has leveraged the attention to raise capital and shift its business strategy towards e-commerce under the leadership of Ryan Cohen. The GameStop saga has left a lasting impact on market dynamics, highlighting the power of retail investors and social media, and has led to ongoing debates about market regulation, transparency, and the ethics of short selling.
Additionally, GameStop currently boasts over $4 billion in cash reserves and zero debt, except for a small French loan taken during COVID-19. Since the squeeze, the community of shareholders has collectively purchased and registered $1.5 billion USD worth of GameStop shares, giving them a 20% ownership stake.
Gamestop shareholders say it is even higher. Are you interested to know why?
Furthermore, GameStop’s stock is still up 1800% over the last 5 years, and fundamentals continue to improve and challenge the short thesis held by institutional investors, who have opted to maintain their positions open rather than closing and buying back shares. In fact, in May 2024, institutions with heavy short positions actually doubled down. Indicating to the new generation of value investors that they too need to double down. And so... They have, and will continue too, because they know the full extent of the situation that these short hedge funds have been trying to keep the lid on for all these years. This new wave of retail investors understands a powerful strategy: by banding together to consistently buy, register, and hold their shares, short sellers CAN NOT close their positions. These retail investors know that they can hold their shares longer than these hedge funds can stay solvent...
Interested in learning about 'short selling' and its impact on economies? Short selling is a trading strategy where investors bet against a stock, hoping its price will fall. This practice is controversial because it can exacerbate market volatility and lead to rapid price declines, potentially harming companies and even entire economies.