GameStop: the internet has finally become aware of its financial might

By Eray Arda Akartuna
AML, Bitcoin & Cyber Analyst

Be it inspiring or insurrectionary, the internet has increasingly shown itself to be a growing source of social and political activism. Twitter, TikTok and YouTube (remember Kony 2012?)  have all had their fair share of viral campaigns in the past, though arguably the consequences have been short-lived. Enter Reddit, the source of the latest internet campaign that has taken the financial world by storm, posing unique implications not seen before in previous online trends.

What happened?

In short terms (pun not intended), the saga began when numerous hedge funds decided to ‘short-sell’ (i.e. borrow and sell shares in anticipation that they would later fall in value) of GameStop, a struggling gaming retailer.[i] If these hedge funds had anticipated correctly and GameStop shares fell, they would have been bought back by at a lower price, thus making a profit – the caveat being that if they increased in value, they would make a loss.

Decrying this as a typical Wall Street act of greed similar to the devastating recklessness causing the global financial crash of 2007-08, novice investors in the 4 million-strong Reddit community ‘r/wallstreetbets’ began ‘short squeezing’ (buying large amounts of) GameStop stock, sending it skyrocketing in value. In the week leading up to 29 January, stock prices rose over 1,000%, boosted by Elon Musk drawing attention to the efforts on Twitter.[ii]

Hedge funds betting against GameStop collectively lost around $6bn due to the intervention, of which $2.79bn was lost on 25 January alone.[iii] Melvin Capital, a hedge fund betting against GameStop, closed its position to huge financial losses, requiring a $3bn injection amid murmurs (eventually denied) of possible bankruptcy.[iv] The wider implications were far more severe – data from analytics firm Ortex showed that short sellers had accumulated over $70bn in losses overall in 2021 so far.[v]

The ordeal signifies the internet’s first significant assertion of its might in the financial world, perhaps surprising even its own initiators. Trading apps have since restricted affected stocks and the White House appears to be concerned enough to be ‘monitoring’ the situation.[vi] In a manner not seen in previous viral online campaigns, the pockets of the wealthy are, this time, being hit hard. As the internet becomes aware of its financial power and powerful stakeholders aim to prevent repetitions in the future, the question remains whether this will ‘blow over’ like many campaigns have done in the past, or whether it is a sign of major change yet to come.

Financial activism: a new normal for the future?

Unlike viral memes or social media trends, this saga has shown that the Internet now has the capabilities to disrupt industries where power was mainly held by those with significant financial capital. There were previous indicators that this power could be challenged – the relatively recent popularity of crowdfunding for causes and business ideas, for example, has shown just how much and quickly the internet can finance a worthwhile venture without the need for wealthy investors. The GameStop ordeal, in summary, was a long time coming.

Whether wealthy stakeholders can reclaim their power is another issue complicated by wider advances in technology. As Blockchains seek to bypass BigTech companies and offer decentralised platforms for trading all sorts of virtual assets, responses such as restricting trading on centralised platforms will likely become even more futile than they already are.

A united response from Wall Street or its political supporters is also unlikely. Within the spirit of free market competition lies several adversaries to those negatively affected by the GameStop ordeal, who are likely elated to see their competitors’ near-demise. To them, the internet has not only shown itself to be a threat, but also potentially a powerful financial actor ripe for manipulation. By injecting ‘moral’ incentives into powerful and politically motivated online communities, competitors can incite similar short squeezes against their rivals betting positions, turning what was an anti-Wall Street backlash into inadvertent actions directly in the interests of certain Wall Street giants.

In addition, it would be foolish to assume that the Reddit users driving up stock prices consist entirely of ideologically united moralists that would never succumb to their newfound ability to generate large personal profits. Many such users, likely to be enough to be instrumental in assuring the massive price hike in the first place, will be in it for why most other people are in it – for the winnings. It is unlikely, therefore, that such a lucrative internet campaign can remain purely ideological and committed to the ‘anti-Wall Street’ (or any other) cause. If the GameStop saga is to repeat itself in the future, its effects will likely be diluted as profit-motivated participants jump ship when it is most financially rewarding to them. To exemplify this, GameStop shares themselves dropped 24% on 28 January as many amateur investors cashed in their profits, despite impassioned Reddit users calling for them to hold and continue teaching Wall Street a lesson. Many did so to pay off their college fees or medical bills.[vii] This raises questions of whether such future actions can degenerate into ‘pump-and-dump’ schemes and essentially replicate the market manipulation that inspired their cause in the first place.

Nevertheless, the GameStop ordeal has raised awareness amongst online users of their ability to cause change en-masse. While the implications on financial trading remains to be seen, this poses significant wider implications, particularly in circumstances where there is no trade-off between cause and profit. For example, ever since the Cambridge Analytica scandal, the internet has become conscious of (but is yet to deliver a fatal blow to) corporations harvesting their personal data for commercial purposes. That is now changing, with large-scale trends and boycotts now gathering pace and posing serious threats to technology services that once took their user base for granted. As WhatsApp loses millions of users due to its recent privacy policy changes,[viii] the powers that be will undoubtedly look for new and perhaps sinister ways to contain this new mighty digital power that has become self-aware.

References:

[i] Allison Morrow, ‘Everything You Need to Know about How a Reddit Group Blew up GameStop’s Stock’, CNN, 28 January 2021, https://www.cnn.com/2021/01/27/investing/gamestop-reddit-stock/index.html.

[ii] Allison Morrow, ‘Elon Musk Tweet Fuels Frenzied GameStop Surge – CNN’, CNN Business, 28 January 2021, https://edition.cnn.com/2021/01/26/investing/gamestop-stock-elon-musk-reddit/index.html.

[iii] Ines Ferré, ‘GameStop Shares Go on Rollercoaster Ride to Close 18% Higher’, Yahoo Finance, 26 January 2021, https://finance.yahoo.com/news/game-stop-shares-go-on-rollercoaster-ride-to-close-18-higher-220714337.html.

[iv] Yun Li, ‘Melvin Capital, Hedge Fund Targeted by Reddit Board, Closes out of GameStop Short Position’, CNBC, 27 January 2021, sec. Markets, https://www.cnbc.com/2021/01/27/hedge-fund-targeted-by-reddit-board-melvin-capital-closed-out-of-gamestop-short-position-tuesday.html.

[v] Sujata Rao, ‘Losses on Short Positions in U.S. Firms Top $70 Billion – Ortex Data’, Reuters, 28 January 2021, https://www.reuters.com/article/us-retail-trading-shortbets-idUSKBN29X1SW.

[vi] Reuters Staff, ‘White House Monitoring Situation Involving GameStop, Other Firms’, Reuters, 27 January 2021, https://www.reuters.com/article/us-gamestop-white-house-idUSKBN29W2I1; Sky News, ‘GameStop Shares Fall 44% after Trading Apps Block Reddit-Fuelled Surge | Business News’, Sky News, 29 January 2021, https://news.sky.com/story/gamestop-shares-fall-44-after-trading-apps-block-reddit-fuelled-surge-12201860.

[vii] Aarthi Swaminathan, ‘“I Love You Guys”: Redditor Betting on GameStop Claimed to Use Profits to Pay off Student Loans’, Yahoo Finance, 25 January 2021, https://finance.yahoo.com/news/gamestop-reddit-student-loans-190949534.html.

[viii] Alex Hern, ‘WhatsApp Loses Millions of Users after Terms Update’, The Guardian, 24 January 2021, sec. Technology, https://www.theguardian.com/technology/2021/jan/24/whatsapp-loses-millions-of-users-after-terms-update.

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