Gamestop, Wallstreetbets & Crypto

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WSB Background

Wallstreetbets reddit forum became popular on mainstream news websites back in early 2020; the articles mainly focused on the huge displays of over-leveraged positions which led to life changing gains and eye-watering losses. The group has a very peculiar tribal culture with their own financial slang, love for memes, disdain for institutions, proud displays of losses and an overall strong hand attitude.

With over 8.5 million users however the organization of the group has taken a toll as the attention of investors has been shifting from Gamestop to other stocks being discussed in the forum. Furthermore there are complaints or rumors of bots shilling other stocks and/or discouraging WSB investors to sell their GME Gamestock shares. As if that wasn’t enough, a recent WSB post states that there is a fight for the control of the forum between the current moderators and the original moderators, to get paid for a movie deal and to “…use WSB as a springboard to launch some crypto shit…”

WSB however, is far more than a crypto-like pump and dump moonboys telegram group, there is actual discussion and sound research being presented by their users on various stocks under the label DD (due diligence).

GME GameStop

GameStop sells new and preowned video games, consoles and accessories through their retail stores in the US, Canada, Australia and Europe. Since the early 2010’s the GME has been struggling with their business model as videogames have been shifting from physical to digital delivery, internet speeds allow for faster downloads and online retailers offer substantially cheaper options for hardware and software licenses.

To make matters worse, the video game industry, which saw a strong increase in 2020, has already embraced disruptive technologies that make physical retailers obsolete, such as:

–    Netflix-like subscription services ($5-$15/month) which give users access to the whole video games catalog for a fraction of the price of a single videogame ($40-$60).

–    Discount shopify/Amazon-like online retailers that sell video game and software licenses at a discount as well as hardware.

–    The development of Cloud computing gaming platforms ($20-$50/month), which enable users to play the most demanding video games on basic computers, tablets or smartphones.

Add to that, Covid-19 curfews, a rebalancing of consumer spending over saving and you have a perfect recipe for a short on GME stock

Short selling vs Naked short selling

Several hedge funds saw the impact of digitalization in the videogame industry and decided to short Gamestop shares. Shorting consists in borrowing shares of a stock, selling them at market price and buying those shares back at a later date with the expectation that the market price will be lower.

When hedge funds place a short order, the stock broker has to search in its inventory of accounts (my account or yours)* to see if these stock shares are even available for lending.

* Most stock brokers lend their users uninvested cash balance and stock shares for a profit. Whenever this happens, you won’t get notified about your shares being lent and you probably won’t receive any interest from it, depending on your broker.

Now that we have established that for shares to be sold short, the shares have to exist. Let’s take a look at GME stock statistics:

65.2 Million Outstanding shares: The total universe of GME shares that exist including shares in reserve by the company.

50.65 Million Float: The float refers to the total amount of shares available for public trading excluding.

121.98% Short Float: The short float is the percentage of the shares available for trading currently being short.

GME’s current short float according to is at 121.98%, which seems to indicate that these hedge funds incurred in illegal activities. Since the practice of short selling more shares than are available (float), also known as naked short selling, has been banned by the Securities and Exchange Commission (SEC) after the financial crisis of 2008.

WallstreetBets and the Shortsqueeze

While the SEC and mainstream media try to taint the image of this forum as an organized pump and dump; WSB’s role is arguably, more of an educational nature as evidenced by the due diligence on the fundamental value of the stock and the opportunity of a short squeeze.

Keith Gill – u/deepfuckingvalue

The Financial analyst and WSB member started posting videos on GME as far back as June 2020. In the videos Gill provides an alternative view of the stock based on a strong cash position before and after the release of new generation gaming consoles and the opportunity to reinvent itself and the event of a short squeeze.

Short Squeeze

A short squeeze is a rapid increase in the price of a stock due to an excess of demand that isn’t driven by any sort of fundamental value. In the GME scenario, hedge funds that borrowed shares in the sub $20 price range had to buy back the shares they borrowed at increasingly higher prices, because retail investors and some institutional investors had been buying the stock since the $3-$5 level all the way up to $300 per share. This led to huge losses of up to $70 billion USD according to Reuters and is likely going to cause significant losses for the retail investors that bought the stock late, should they decide to sell at current prices.

What does it mean for crypto

Forums and Telegram groups are nothing new in this space, neither is the strong hands attitude since most altcoins were as low as 90% down from their all time high, not long ago.

Wallstreetbets brings nothing new to the crypto space, especially since its content rules forbid any sort of crypto discussions. One could argue, however, that these recent events have evidenced the need for the tokenization securities; which would allow users to trade their securities without stock broker restrictions and prevent hedge funds from shorting stock over 100%.

Additionally, Crypto gambling has no credit card fraud as no one can access the crypto funds of another person, so long as the private key or hardware wallet is kept safe from prying hands.

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