The week of January 11th, 2021, something truly extraordinary happened. The price of Gamestop stock (GME) jumped from an opening price of $19.94 to $35.50 in one week. The next week it jumped to $65, and then $325 the next. What drove this incredible rally was not some world-changing innovation or even company news: it was an online message board.
A community called r/Wallstreetbets (WSB) has now existed on social news website Reddit for many years. Initially founded by an exiled investor, WSB became a place for amatuer traders to make big bets on the stock market, typically with huge amounts of leverage in order to magnify their gains or their frequent losses. What caused GME to balloon was a mix of ingenuity from this group and media hype. The group discovered that multiple hedge funds had huge short positions on Gamestop.
Shorting a stock means you are borrowing a stock and selling that stock at the current price, betting that the price will drop. This is so one can buy back the shares that were borrowed (and need to return) and pocket the difference from the initial sale price and the current. Shorting securities is risky because unlike investing, a security has a theoretical infinite percent-increase potential whereas investing the most one can lose is 100%. On top of this, there is typically a flat fee to pay while borrowing the shares. That means if a price rises on a security you have shorted and you don’t want to sell, then you will eventually bleed your money out to fees.
A few members from WSB placed call options on GME over the summer (betting the price will go up) and used the passing months to build up hype on the message board. They hoped to create a short squeeze, something that occurs when price increases on a stock cause short holders to close their positions, thus pushing up the price even higher and forcing more short holders to close their positions.
When the price of GME ballooned in early January, every major news outlet picked up the story. There were bulletins pasted on each front page advertising the millions of dollars in profit that a few choice members had made on this wacky bet. As with market bubbles, people began to experience FOMO; they wanted their own 30,000% gain. Soon WSB began to explode. Membership jumped from 1.2 million to over 6 million.
The issue with this rise is that the vast majority of those who invested after Jan 11th lost money. Many were people with absolutely no investing experience who were risking college funds and mortgages to profit off of GME’s rising value. Unfortunately, bubbles only last as long as investors believe there is someone else waiting to buy their stock for more money. Once the early investors cashed out and made their big bucks, the amount of takers continued to drop. Bubbles are essentially pyramid schemes waiting to collapse.
As membership on the forum grew, so did the amount of misinformation. Cries of market manipulation and fund collusion ran wild. Members yelled at each other in the comments to hold their stock with “diamond hands” and shame those selling out. Newcomers proclaimed a doctrine of “taking their fair share” and “fighting back against Wall Street”.
Within all this chaos was one constant: greed. The Gamestop rally didn’t start off as a political movement manifestation or a class crusade; it started as a group of people looking to make a quick buck.