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Gamestop stock: rise, crash and consequences
Gamestop stock: rise, crash and consequences
World News

Gamestop stock: rise, crash and consequences

By Eleonora Spagnolo - 20 Feb 2021

Chevron down

After rallying in recent weeks, the Gamestop stock is practically back where it started. 

If anything, it seems to be heading for a decline as abrupt as its rise. It is enough to note that on Thursday, February 18th, it lost 11%

The Gamestop case has opened up a profound debate on what happened, and on the importance of social networks and apps. This is a matter of speculation, both for small investors from WallStreetBets and hedge funds.

What happened with the GameStop stock

GameStop was a company in deep crisis in December of last year. Listed on the stock exchange since 2004, it has experienced two types of crisis: 

  • the evolution towards digital gaming, which made the physical shop chains unprofitable,
  • the pandemic. 

In December 2020, the RC Ventures fund acquired 13% of the company for $76 million and presented an ecommerce-focused relaunch plan. In January, GameStop’s shares rose from $4 to $18. 

But despite this, hedge funds were betting on GameStop’s demise. As a result, Melvin Capital and Citron Research started short selling GameStop’s shares. 

The short sale works like this: the fund borrows the shares and sells them, the price drops, then the fund buys them back at a lower price and returns them to the lender, earning the difference. 

This is where WallStreetBets comes in, the Reddit forum where “small investors” noticed that 130% of the outstanding shares were for sale: this alone explains an unhealthy market. Exploiting a simple law of the market, that as demand increases so does the price, retail investors started buying GameStop shares en masse. This drove the share price up to a peak of $483. As GameStop’s share price rose, so did the debt exposure of the hedge funds, which were no longer able to buy back shares that had suddenly risen in price. 

The narrative is that a group of small investors used a simple trading app to checkmate the big boys in finance. But the story is not quite as simple as that, because Robinhood has since stopped trading Gamestop, the SEC has turned the spotlight on the case, and even the US Congress will be holding hearings in the next few days with the protagonists of this affair: the hedge fund representatives, the CEO of Robinhood, the CEO of Reddit and a YouTuber. 

The consequences

Marco Bernasconi on Tradingview commented:

“The GameStop effect has caused such consequences:

Professional investors are now prepared for increased market volatility.

Politicians in Washington are now questioning the negative consequences of this on the markets”.

In short, the surge in the Gamestop stock could lead to changes in regulation.

But what is certain is that the Gamestop frenzy has been so exaggerated that in recent days it emerged that as much as $359 million, or 2 million shares, were never delivered to those who had bought them. This was revealed by Bloomberg. This is evidence that shares that were not actually there were placed on the market. 

Bill Gates has also spoken out on the need for regulation. The founder of Microsoft told CNBC that he was against this speculation, which he compared to betting:  

“People enjoy gambling. Sadly, it’s a zero sum game. The idea that you drive a valuation way, way beyond what is rational, it’s hard to see that societally as a good use of time. And, you know, the people who get in it early get a windfall. The people who get in late feel like suckers”.

That’s why we need to step in and regulate speculation, just like gambling is regulated

“Reddit forums where people have a reason to kind of push something and get out at those high prices, you know, the [Securities and Exchange Commission] has got to look at this because we don’t think of the stock market as just performing a casino-like role. We have restrictions on gambling activities”.

And that’s a good reason to curb the betting that goes on in the markets as well. 

 

Eleonora Spagnolo
Eleonora Spagnolo

Journalist passionate about the web and the digital world. She graduated with honours in Multimedia Publishing at the University La Sapienza in Rome and completed a master's degree in Web and Social Media Marketing.

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