GME, AMC, Dogecoin, XRP — What These Organised Pumps Mean for the Future of Financial Markets

The iconic bull at Wall Street, New York

Regardless of your interest in the stock markets or finance, you have probably heard of the company GameStop ($GME) in the last few days. The media attention this one stock got has been unprecedented in recent history. At this point, everyone and their grandma has heard about GameStop. How did a regular old business, specially one that, fundamentally speaking, has an outdated retail business model in the gaming industry — kind of like Blockbuster’s model in the film and television industry, manage to grab more eyeballs than the Apples and the Teslas of the world?

It all started on Reddit. Specifically, the subreddit WallStreetBets. It’s a community for people interested in trading and investing in stocks (or stonks, as they sometimes like to call it) and they generally tend to be more interested in stock options than regular old buying and selling.

In September of 2019, when the stock price of GameStop was trading between $3 and $4, the Reddit user DeepFuckingValue bought about $50,000 in call options for GameStop. He believed the company was extremely undervalued for what it was and announced his position on WallStreetBets. People in the finance world tend to have very strong opinions, and his opinion differed from pretty much everyone else. Needless to say, people called him a massive idiot.

He held his position through the insults and controversies, and ended up doubling down when news of store closures and disappointing performances came up. A few months later, Michael Burry, the investor who called in the housing market crash before anyone and had the movie ‘The Big Short’ made about his legendary trade, announced he is going long on GameStop because he believed that fundamentally the stock was undervalued, for one simple reason — Discs. Sony and Microsoft are still going to have a disc drive even in their next generation gaming consoles. GameStop is at the forefront of that business.

A few months later, the reddit user DeepFuckingValue posted a screenshot of his position on WallStreetBets which showed he was down about $30,000.

This is where it all starts getting interesting.

In June of 2020, GameStop announced a 519% jump in online sales due to store shutdowns. In August of 2020, the billionaire founder of Chewy.com, Ryan Cohen, announced that he bought a 9% stake in GameStop and that he planned on turning it into an online rival for Amazon through his active involvement and re-management of the company. GameStop then announced a multi-year strategic partnership with Microsoft which planned to expand both their retail and digital presence.

This is when WallStreetBets noticed an opportunity for a massive glitch in the market. The short interest in GameStop was the highest of any stock in the market. In fact, it was more than 100% of the total value of the company. 140% at the time. The hedge funds even published articles about why the short makes sense and why GameStop is headed towards ruin. This opened up the possibility of a massive “short squeeze” move. A short position is when an investor borrows shares in a company from brokers and other investors who hold the stock to sell them first, and then buy back in later, ideally for a lower price.

A short squeeze is when long-position investors push the price up till the short sellers are forced to close their positions, which means buying back the stock they initially borrowed and sold. When the short interest, which is more than the value of the company, is forced to buy back stock at much higher prices, it pushes the price up even more and creates a massive buying wave. All they needed was some positive news about the company, which came in the form of the addition of Ryan Cohen to the company and Michael Burry going long. This is what happened when the price of $GME went from $18 to $360 within a few days in January 2021. A 20x increase in 20 days. Pretty much unheard of in the stock market.

Soon, the media picked up on this, and it became the biggest news story of the year yet. This made even more people jump on the bandwagon. The story was pushed as a David Vs. Goliath story where the small retail investor from reddit has to fight to screw over the hedge fund giants. This got the attention of more people than just the people who initially did their research on the market situation and decided to enter after it. They were buying like it was free money.

People then started looking for the next big thing, and collectively decided it was going to be the stock for the company AMC Entertainment. The share price skyrocketed from about $2 to $20. All within the month of January.

The cryptocurrency counterpart of WallStreetBets on reddit, called SatoshiStreetBets took notice and decided they were going to push the price up for Dogecoin —literally a meme coin which has no real use case or value. Elon Musk has tweeted about it a couple of times, as a joke of course. The coin did a 12x within a couple of days. Next was XRP. A group of people made a public telegram group which asked the members to collectively buy XRP at a given time to pump the price up high. The group got over 200,000 members and a lot more eyeballs on Reddit and Twitter.

The price did go up in the days leading to the coordinated time of the pump by about 300%, but when the time came, the price dropped by about 60% from there within minutes. This is common among pump and dump groups and follows the popular aphorism “Buy the rumour, sell the news” among experienced traders.

At the time of writing, $GME is down 74% from its top, AMC is down 61%, and Dogecoin is down almost 70%. In the financial markets, for every big winner there are many losers, ranging from small to big. The difference between how all of this started and how it’s going now? It is who those losers are.

With $GME, the retail investor noticed that hedge funds are over leveraged and are taking more risk than they can afford to. They saw a viable opportunity where the loser would be the hedge fund, who we know can afford to brush off losses much better than the small time investor. What happened after the $GME rise was just extreme market hype in the face of inorganic price rises and subsequent drops. The definition of a bubble. As we have seem time and again with the .com bubble, the housing bubble, the 2017 ICO bubble, and countless others, when it bursts, it gets ugly. Many more people lost money on all of these financial instruments than the ones who profited off of them. And it certainly wasn’t the rich hedge funds losing all that money.

All of these extremely volatile, bubble like price movements also indicate the possibility of a wider burst incoming, as governments around the world have helped pump the stock markets with major stimulus packages. At the time when the world economy is at its lowest point in recent history, the stock markets are at an all time high. The stock market isn’t a representation of the economy, but when the gap widens to this extent, it does point towards a bubble.

What are the likely effects of these events on the future of financial markets?

The people who got tangled in the hype and ended up buying at higher price points are, understandably, going to lose a lot of trust in the market. Many other people who have been observing from the sidelines are also likely to lose some trust and interest in the current system. And if people see the involved hedge funds coming out as the final winners, the retail investor is probably not going to be very jubilant about it. Time and again we have seen these bubbles burst and the losers nearly always end up being either the retail investors, or the taxpayers. This trend seems to be catching momentum and the frequency of these bubbles only seems to be increasing.

The solution? Decentralised finance. The concept of decentralised finance (DeFi) has been gaining a lot of traction in the recent years. The idea is to take the middleman out of the equation and create a fair system that does not give an unfair advantage to the big players in the game. There are many companies already working in the DeFi space and it’s getting more supporters by the day.

However, realistically speaking, moving from centralised financial systems to decentralised ones is going to take a long time, and it’s not going to be an easy road for anyone. Nobody who holds the power wants to let it go. It is, however, inevitable that a revolution is going to be the only way out one day.

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Parv Prabhakar

Fintech analyst, trader, and investor. Crypto, stocks, options, in that order.