If you’ve had trouble following the news the past few weeks, I don’t blame you. GameStop, Robinhood, short squeezes and options, hedge funds, r/wallstreetbets, and now Bitcoin. Previously obscure and technical terms for nerds like me are making their way into the mainstream and everything seems to be going to the moon ???.
The end of January saw a lot of people make unusual investing decisions. Some of them made a lot of money and some of them lost a lot of money. In the words of Charles Dickens,
“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness… it was the spring of hope, it was the winter of despair.”
You may have heard a swirl of narratives explaining why the r/WallStreetBets and GameStop phenomenon occurred and blaming one side or the other. I’ll try and break it down here without bias.
Why did it happen? What does it say about the future of investing? And what is the link between last week’s GameStop events and Bitcoin investors? (see more on this at the bottom)
We’ll cover it all.
Setting the Stage
Like many traditional retail outlets, GameStop has been performing poorly for years. In March 2020, their stock hit its all-time low when hedge funds like Melvin Capital took large short positions.
With a short position, they bet on the company’s decline and expected to profit immensely as GameStop collapsed. And they were so confident in their position that they bet billions of dollars more than they should have – more than 100% of the company’s value in fact.
This put the funds at a great deal of risk. If the stock price went up instead of down, anyone with a short position would lose a lot of money… like, a LOT.
Giving Options to the Retail Masses
At the same time, the start of the pandemic saw a huge rise in retail trading, which is trading by regular people who aren’t Wall Street professionals. Today, retail traders account for nearly 25% of all stock trades compared to just 10% in 2019.
And thanks to new brokers and apps like Robinhood, these traders have easy access to a massive amount of investment capital unlike any we’ve seen in history.
It’s all thanks to options contracts – they’re the key to this whole story.
Simply put, options give you leverage that makes it possible to make a larger investment with the same amount of money. You can compare it to a loan that lets you buy stocks with the retail trading app’s money while requiring very little of your own cash.
More technically, options let you freeze the price at which you buy a stock, no matter how much it goes up in the future. For example, if the price of the stock today is $10, you get an option to buy the stock by next week at that price. Let’s say that next week your stock costs $100 – now you can exercise your option to buy it for $10 and then sell it for $100 to someone else for a sweet $90 profit.
Options let regular traders behave like reckless millionaires – and it’s thanks to options that some users of r/WallStreetBest have really become millionaires in the past year.
Rise of the Apes
Coinciding with the rise of the retail trading wave of 2020 was the rise of the Reddit forum r/WallStreetBets.
The forum has been a meeting ground for users, or apes and degenerates as they like to call themselves, to share stock tips and memes, and sometimes coordinate trades that allowed them to, in theory, push the markets in their favour.
These users have infamously posted both large gains and losses on the subreddit, sometimes worth millions of dollars, underscoring a debaucherous financial culture within the forum.
This exactly what happened with GameStop (GME).
As hedge funds bet on GME’s collapse with ever-increasing excitement, a few analytical Redditors with a strong understanding of the stock and derivatives markets found the flaw in their plan. These Redditors pointed out the vulnerability of taking out such massive short positions and betting against more than 100% of the company’s existing stocks.
More importantly, they realized the potential for high gains in taking what would otherwise be considered a foolish trade – a bet that GameStop, which was near its all-time-low stock price, would surpass its all-time high by a substantial amount.
After that, what seems to have happened is that a small group of r/WallStreetbets users that were incredibly financially savvy led the charge into the GME trade.
Now the Game Was On.
Via apps like Robinhood, retail traders began buying GME call options, making a bet that the stock would increase in value.
When enough call options are placed, brokerages have to buy some of the underlying stock as a way to protect themselves and cover their traders’ options in the event that the stock price climbs.
And when this many call options were placed by so many individuals at once, coordinated on r/WallStreetBets, it forced the brokerages to buy so much of the stock that the price began to go, as the apes might say, to the moon ???.
As long as people kept buying and no one sold the stock, this trend was expected to grow exponentially.
And it seemed to work.
At one point, Gamestop was the most bought stock in U.S. financial markets, towering over behemoths like Apple and Tesla. Gamestop’s stock price climbed from a March 2020 low of less than $3.00 to the high teens by late December 2020, rallying over 500%.
But things got truly extraordinary when the price soared in January 2020 and at one point surpassed $450. Some Redditors made millions while hedge funds lost billions.
As shares began their steady climb during the last four months of 2020, more and more users joined the bandwagon. And as part of their welcome party they were reminded of the code of conduct: never sell, never surrender.
The large rise in the stock price can be attributed to r/WallStreetBetters heeding this message.
But what motivated them to join the rally? And why is it that thousands refused to sell their GME stock even as it became clear that the rally was over?
This is where Bitcoin connects to this dramatic story.
The Aftermath and Occupy Wall Street
The narratives that explain the rise and fall of GME have been as dramatic as the price movement itself.
On the side of the Reddit users, the motivation was clearly not just to profit from the trade. A few key users seemed to be ‘rallying the troops’ for something more than a chance to earn some cash.
As some traders jumped on board to capitalize on a meme trend or exercise a carefully analyzed financial investment, another notable group was the one made up of people appearing to invest as a political protest against Wall Street, to stick it to the hedge funds.
This group grew out of the devastation caused by the 2008 financial crisis and was compared to a new iteration of the Occupy Wall Street movement by journalists. For these traders, the hedge funds represented both the stereotypical ultra-rich and the morally ambiguous, powerful actors that seemingly dictate society with little consequence.
This is why even in the aftermath of the rally, as GME stock rapidly falls, thousands refuse to sell or surrender. Many traders say they will never sell their GME stock, even if the price falls to zero.
Alliance with Bitcoin
For this reason, many within our cryptocurrency community allied momentarily with the GME trade and r/WallStreetBets. There was a hint of a cause that aligned with the general ethos in the cryptocurrency environment.
Like Occupy Wall Street, Bitcoin was also introduced to the world in the chaos after the 2008 financial crash. At the time, confidence in banks, Wall Street and the government was at an all time low, and the founders attempted to create a way out of the near-monopoly that Wall Street and financial institutions had over people’s lives.
As the cryptocurrency community allied itself to r/WallStreetBets, it isn’t unreasonable to predict that one day in the near future the same will happen in reverse.
After all, although the depth of bitcoin is still lost on many, including those within the r/WallStreetBets subreddit, it already has many of the other qualities that attracted them to GameStop:
- For the moment, it has a meme quality to it and the subreddit’s favourite people are big fans, including Elon Musk
- It’s still in its early days of adoption but has the potential to go to the moon in the very near future (some predict $300k by end of 2021)
- It operates outside the traditional financial system, letting investors stick it to Wall Street and the government once again
- It has strong fundamentals
- It’s increasingly accepted and understood in our society and becomes a more reputable and secure investment each year
What Could This Mean for Bitcoin Investors?
In the near future, it’s possible that the soundness, and strength of bitcoin as a tool that can dismantle flawed power structures and level the playing field in society, becomes known to this group of rebellious traders.
The discovery process for bitcoin in the western world has been slow. Western property laws have been historically reputable and western currency has not devalued significantly against common goods in recent history. But this is not true for all areas in the world, where bitcoin is a source of hope and salvation.
Perhaps one day the same will be true of bitcoin in North America. Until then, we hope that the r/WallStreetBets crowd influences enough ‘everyday folk’ to research Bitcoin and discover why they should protect their assets with the largest and most secure network ever assembled.
As for me, I like the currency and encourage everyone who has an interest in investing to discover its own dramatic history and world of future possibilities.
If you want to know more about recent Bitcoin trends and financial news, follow AQRE or Chelle Service Capital on social media, and learn about how our companies are harnessing today’s technology to innovate traditional industries:
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Sources not directly cited: