Say what you will about the valuations, the banning of Wall Street Bets is beyond ridiculous. While we don’t think any of these companies are worth their current market cap… that is not the point of this post (at the end we’ll explain why). Instead, we’ll walk through what exactly is happening and why we’re pro Reddit and against the “coincidental” banning of Wall Street Bets.
Fundamental View: People complain that there is no “fundamental reason” why GameStop is soaring. We’d argue there *IS* a fundamental view. The fundamental reason is Melvin Capital shorted 100%+ of the stock. This in turn created an opportunity for them to be short squeezed into oblivion. That sounds like a lot of financial chatter for anyone who doesn’t understand what a float is or what shares are. So we’ll dumb it down even more.
The stock market is a market. This means that normal companies have say “100 shares” to trade. Think of it like apples. If you have millions of apples being traded every single day they will eventually meet a price point of say $0.25 per apple. This is healthy.
Now a new person comes in and we’ll call him Melvin. Melvin decides to sell every single apple on the market leaving the available apple market of just 100 apples. Melvin will sell all apples at any price. This creates a strange scenario. Since Melvin is saying all apples are worthless now the remaining 100 apples determine the “current price”.
A bunch of individuals around the world create a forum to buy apples (Wall Street Bets). They then realize they can make a TON of money by simply buying the 100 apples from one another at an ever increasing price. This is normally a prisoners dilemma game because who would buy 100 apples knowing Melvin is just going to sell it. Well… If you all work together, we know how prisoners dilemma works. If everyone agrees to just bid up the apples… the only person who gets screwed is Mr. Melvin!
That is a rudimentary example of what happened. By shorting the entire company, there were only a few shares to trade. Smart retail investors then slammed the stock, buying it rapidly with small sums of money sending the price to the moon.
Now who is to blame here? Apparently according to our society, it is Wall Street Bets. The view on this side of the web is it is Melvin’s fault. If you short 100% of a company which is legal, you put yourself up for a short squeeze which is entirely fair/reasonable. If they want to prevent this type of price action, then there should be rules that state only 50-60% of a Company can be sold short (we’re making it up). There is no logical reason to blame Wall Street Bets.
No It Is Not Insider Trading: Wall Street funds have idea dinners. These are events where the 10-15 biggest managers all meet and drink wine. They decide which “stocks” are the best buys and all go into them. How is this any different from a bunch of retail investors seeing a short squeeze opportunity? It isn’t different at all. If 15 major fund managers with $10B+ each can dump into a stock due to a private conversation, how come retail investors can’t do it in a public conversation. At least the public conversation is honest.
In fact this is extremely intelligent “fundamental market analysis”. If you realize a fund can be short squeezed to the tune of $10B+… Why wouldn’t you squeeze them. They put themselves at massive risk (with client money no less) and deserve to be punished for levering up and shorting the stock (excessive greed).
Onto the Future: Right now shutting down these types of market moves is possible due to circuit breakers and centralized exchanges/servers. What happens where the servers are all decentralized and the market is on-chain 24/7/365? At that point there will be no circuit breakers and the market will move prices organically. It also reduces the use of leverage. Who in their right mind would lever up heavily in a 24/7/365 market? No one intelligent. So, the long-term future of decentralized exchanges is high.
Millions of people learned how this game is played and it’s going to come back at some point. Maybe it dies down for a day, a month, a year… But the playbook is now out there. If a hedge fund is foolish enough to put themselves in that type of position, they will get burned again and again and again. This is great as firms should not be levering up 5-10x with customer money to short every single share of a single stock without any repercussions.
On that note this was a huge day for decentralization. Several people on our twitter commentary actually understand it. They will be rich. Filthy rich. The ones that do not, might get lucky and time the next pump. And. The real money goes to the same old people. The visionaries who understand the long-term consequences and invest in the right disruptive technologies/industries.
Q&A still set for Friday. Enjoy the fireworks in the meantime!
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