Let’s do some pumps! How Reddit traders defeated Wall Street short-sellers

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GameStop, a rather old-fashioned company that sells physical copies of video games in shops in dying malls, is currently the hottest stock in the United States, a “meme stock.” The GameStop microstock listed on the NYSE is at the center of small investors’ battle organizing via Reddit against institutional Wall Street short-sellers. The share price jumped from $4 last summer to $20 at the end of 2020, to $40 two weeks ago. At the time of publishing, it is worth $126, resulting in a market capitalization of more than $8B. Already down from $400 and $28B, respectively. How so? Here is the story in a nutshell.

Fighting short-sellers

GameStop Chart

The popular day-trading Reddit forum WallStreetBets with its 4.6M Degenerates (and counting) and an associated Twitter account with more than 470k followers, likes to target short-sellers. Shorting” is a bet that a company’s stock will become less valuable.

For the short-sellers, GameStop actually must have looked like a perfect target. The company is expected to lose money this year and next. Revenue expectations are sluggish because gamers no longer need to go to the mall to buy games or consoles. However, some investors found that GameStop was seriously undervalued, especially when video games have become en-vogue again in stay-at-home pandemic times.

Now news but social media power

GameStop shop

There was no substantial news from GameStop that could justify such an increase in the share price. On January 11, 2020, the company had added three new directors, including one that brought the digital experience to the table. Good news for a largely outdated brick-and-mortar GameStop. Its stock rose a little less than 13% that day. Two days later, it rose 57%. Then 27%. The next week, it surged 10% twice and 51% another day. The stock continued its vertiginous rise on Wednesday, hitting a fresh 52-week high of $354.83, making the 13% stake held by Ryan Cohen, 34, GameStop’s largest single shareholder, worth more than $1.3bn.

GameStop isn’t the only microstock getting pumped up like this. In its very essence, the WallStreetBets run a pump-and-dump scheme.

Pump-and-dump it is?

Is it a bubble? It sure is. Sure, GameStop may have been undervalued, but none of the companies that the WallStreetBets guys are promoting have fundamentals to support these super-surging stock prices. At some point, reality has to set in. Reality is by all means that this is an old-fashioned pump-and-dump scheme in new clothes.

The WallStreetBets guys, on the other hand, argue that this is a new paradigm where the masses have the power and hedge funds are scared. A top post on the subreddit this morning was called this: “FOR ALL THE BIG FUCKING HEDGE FUNDS MONITORING US, THIS IS A MESSAGE FROM US TO YOU, WE FUCKING OWN YOU NOW, FUCK. YOU.”

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