How Forum Geeks Beat the Exchanges: the Story of WallStreetBets
For years, the community has remained in the shadows. Still, recent events have provided a whole new way of looking at how ordinary people can stand up to the bureaucratic machine of big business. How? CoinsPaid Media will tell you.
WSB: The Beginning of a Revolution
On September 19, 2020, a Reddit user named Player896 published a post on his channel titled “Institutional Investor Bankruptcy for Dummies, ft GameStop.” In this post, he described the compelling case for GameStop (GME), one of the largest U.S. retailers in the games and consoles segment. Since November 2015, the company’s stock has fallen steadily due to the shift from physical to digital formats, and then went to zero due to the COVID-19 pandemic.
The author noted that third-party institutions actively traded GameStop stocks. Meanwhile, Chewy co-founder Ryan Cohen spent nearly $76 million on GameStop stocks, which is 12.9% of the company’s total assets. Cohen, Apple Inc.’s largest individual shareholder, later joined GameStop’s board of directors, causing the share price to skyrocket by 50%.
Even after Cohen joined the board and the share price began to rise, several hedge funds continued to short GME shares. It was most likely an attempt by the big players to outsmart the amateur traders and provoke panic selling. However, the WallStreetBets community on Reddit saw this as an opportunity to fight back against the financial elite and decided to spur the lust for profit. When institutional investors short a stock, they borrow some stock they think will fall in value, sell it at the highest possible value, and try to buy it back later at a lower price. If it turns successful, they pay back the original loan amount and pocket the difference.
However, if the market turns against them and the stock price rises, the trader is forced to buy it back at a loss. Thus, if the price rises sharply within a short period, it can lead to devastating losses for the short seller. In addition, as short-sellers are forced to buy back assets, it contributes to even more significant price increases. In other words, speculation in response to speculation can cause enormous price increases exponentially.
The GME stock soared more than 1,800% in nine days, from $19.79 to a high of $380. Cohen’s 13 percent stake in the company is now worth $2.5 billion.
The world’s richest man, Elon Musk, added even more fuel to WSB’s fire by tweeting his support with the word “Gamestonk!” on his Twitter account.
WallStreetBets traders didn’t stop there. BlackBerry, AMC, Nokia and Bed Bath & Beyond were the next group of companies with heavily shorted stocks to receive WSB approval, showing rallies of 24%, 310%, 70% and 46%, respectively.
In response to this extraordinary event, Adena Friedman, CEO of Nasdaq, the second-largest stock exchange in the world, said that the platform had begun monitoring social media and would stop trading if another WallStreetBets-driven throw-in was noted. Likewise, TD Ameritrade restricted GameStop trading on its platform. The major exchanges simply weren’t prepared for being “beaten” by forum geeks.
At that time, the WallStreetBets channel on Reddit became closed because more than a million new users wanted to join and the admins simply could not cope.
Discord blocked the WallStreetBets server because of a flurry of discriminatory messages and aggressive comments. In a post, WSB moderators commented: “We’ve grown to the size we’ve only dreamed of, literally overnight. We have so many comments and content that we can’t even read them all, let alone act on them as moderators.”
New Ways to Invest
These new retail investors are also contributing to a different way of thinking about investing. For some WallStreetBets participants, investing is part betting, part joke driven by Reddit editors, part scheme to get rich quick.
For others, WallStreetBets represents an opportunity to exploit and identify weaknesses in financial markets. However, there are also competent investors among users. Whatever the goal pursued, the beliefs and risk-taking behavior of this new generation of retail investors are far from those that characterize typical stock market investors. Classic “big guys” listen to financial advisors and favor long-term investments in safe opportunities. And this diametrically opposed behavior has led to the resounding success of WallStreetBets. It has turned the average user into a competitor to market leaders.
Growing Influence of Retail Investors
Until now, retail investors have typically been customers of financial institutions. Conversely, institutional investors, such as large banks and hedge funds and their wealthy clients, have traditionally been seen as smart money who influence the movement of markets.
In contrast, members of WallStreetBets are known for their self-deprecating manner, in which they describe themselves as usually perfect losers. Nevertheless, this influential group consists of “hundreds of miniature Mike Tysons,” who together gained the power to inflict billions of dollars in losses on existing financial companies.
What the Future Holds for Private Investors
As of early September, Reddit WallStreetBets had about 10.8 million members. But it’s just one of many sites where retail investors learn, network and exchange ideas. Together, these amateurs are changing entrenched ideas about investing and gaining influence in the marketplace.
These retail investors are not part of an organized movement trying to change how the financial market works. But as the GameStop saga shows, their online interactions have changed the power dynamics between retail and institutional investors. WallStreetBets Redditors helped drive up GameStop’s stock price, which led to a trading halt.
It is impossible to predict what will happen if GameStop or the WallStreetBets group moves forward. Opinions are divided. Some believe that the large group will disappear and then return as smaller and more concentrated groups. These smaller groups may focus on environmental, social or corporate investments they are passionate about. On the other hand, perhaps the activism of individuals could be the reason for the widespread use of cryptocurrencies and the respect big corporations have for ordinary, seemingly ordinary people.
What does the future hold for the financial world? Place your bets!