Gamestop stock as of this morning is trading around $500 dollars. It is up somewhere around % 2,300 in the past month. This is the result of a “short squeeze”.
Trading has since been halted by corrupt brokers causing the price to drop below $300.
Shorting a stock is when an investor attempts to make money by betting the price of a stock is going to go down. They pay someone a set interest rate and borrow their shares of a given stock. The person borrowing the shares is obligated at some point in the future to return these borrowed shares. Then the borrower sells these shares on the open market. If the price falls over the coming weeks or months, the borrower then buys the shares back at a lower price, returns the shares to the person he borrowed them from, and keeps the difference. That is how shorting works and that is when things go according to plan.
However, if you borrow the shares, sell them, and then the price rises, you are still obligated to give them back to the person you borrowed them from. So you have to buy the shares back at a higher price and thus you lost your money.
There are entire hedge funds that do nothing but shorting stocks. It is totally legal, as it should be, but these funds go above and beyond. Gamestop was shorted 140% ( I’ve seen figures as high as 250%). Which means they borrow the shares, sell them, and borrow them again, and continue to sell. Not only is this extremely reckless, but it creates an incredible amount of selling pressure. This strategy has been used before to put companies out of business that otherwise may have stuck around.
Furthermore, sometimes these funds will short a stock, and then go on popular financial programming like CNBC and bash the company they are shorting. This obviously creates more sellers, makes them profits, and hurts the business.
Short selling should be legal. It is capitalism and the free market. But some of these same funds that short business and pressure them to close , also have their hands extended when things turn south. They have received government bail outs before and will again in the future. That is where the problem lies. If you are going to short a company to 140% , you better be able to handle the consequences if things turn against you.
Let’s get back to Gamestop. Melvin Capital shorted Gamestop extremely heavily. There are other funds who got in on the trade too but Melvin is the largest. WallStreetBets is an online forum of investors on the popular website Reddit. These investors saw that Melvin was being reckless and way too exposed to Gamestop.
WallStreetBets colluded together and started buying up shares of Gamestop at the same time. This drove the price much higher. As the price went higher, these funds who had shorted Gamestop started to see their potential losses skyrocketing. Some of these funds closed their short positions. When you close a short position you have to buy the shares from the market so you can return them to whomever you borrowed them from. This creates even more buying pressure and drives the price even higher. This is a classic short squeeze.
Fast forward to today and Gamestop is sitting around $500 dollars and Melvin is on the brink of bankruptcy. As they should be. They made a bad trade and now they must face the consquences … but wait.
As of yesterday TD Ameritrade banned the trading of Gamestop and a few other stocks. They essentially shut down the free market because their hedge fund buddies were getting absolutely wrecked by a collection of young, smart investors.
Since writing this Robinhood, Schwab, and WeBull have also banned the buying of Gamestop.
They are shutting down free trade because the little guy is winning.
When venture capitalists dump their bags on retail no one gives a shit. You are not allowed to participate in an IPO unless you are an “accredited investor” and even then you better have the right connections. But you sure as hell can buy their bags when a stock like Uber debuts at 90 billion dollars.
It is a disgrace and infuriating.
Luckily for us we are way ahead of this curve.
This entire debacle will be a major bullish catalyst for DeFI, decentralized finance.
Decentralized finance is anything that you do in traditional markets ( lending, trading, borrowing) but done on a decentralized blockchain. This blockchain cannot be shut down. You cannot stop trades. You can’t stop someone from borrowing money. It is impossible. Not only does it allow the people shut out from current system to partake in the financial world, it provides a better experience for the people already involved. Everything about DeFi is better ( or is going to be better ) than TradFi (traditional finance). Hedge fund managers live in ivory towers who don’t hesistate to take your money but will have the rules changed the second you take theirs. DeFi offers a fair system where the rules cannot be changed.
Synthetix offers listing of derivative assets and Aave offers decentralized lending. In the not so distant future there will be derivatives of stocks being traded on Ethereum . This entire situation has made me even more bullish on DeFi and bearish on traditional finance. People are waking up to the fact that they are in a corrupt and rigged system. Cryptocurrency is the way out of that. I fully believe some of these assets we talk about on this newsletter will be the most valuable assets on the planet in the future.
Centralized finance is dying. DeFi is a better alternative. It is just a matter of time until the world wakes up and realizes the potential cryptocurrency has to offer.
Catalytic Event for sure! $GME brought me to look at trying to game and gamble with BOOMER stocks. First hand experience of the market manipulation and rigged game --> Cryto is the future. Those events convinced me. The world was given 1 big fat red pill, and now it's a ticking timebomb until DeFi is the only way. I only hope i get enough skin in before the timer runs out...