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The good, the bad, and the ugly

The good, the bad, and the ugly

Kim Kardashian isn’t the only one to have broken the internet by the looks of things. GameStop went one further and broke the stock market too.

What started as a subreddit thread on Reddit, aptly called r/WallStreetBets, gave rise to users sharing knowledge and tips on what stocks may or may not perform well.

Not long after, the powers that be on Twitter picked up on it (notably Elon Musk tweeting “GamesStonk!!” with a link to the thread), and within days GameStop’s share price reached an all-time intraday high of $483.00 on the New York Stock Exchange. Not bad for a company that looked pretty dismal amidst the ongoing lockdowns.

This ultimately sent shockwaves across the markets, with a mass uptake of GameStop shares, causing mass hysteria in the process for hedge fund managers, who did not anticipate the share price to increase dramatically, thus making major financial losses.   

The coordinated efforts of the Reddit community have given rise to considering who holds real power: retail investors or hedge funds? After Robinhood sensationally paused all trading transactions regarding GameStop, questions began to swirl regarding how far an app built to democratize investing is really serving the interests of its customers.

Let’s dive deeper…

The Good

GameStop, a video game retailer, has over 5,000 stores across the USA. Throughout the pandemic, GameStop had been struggling (like many retailers) due to malls losing footfall, not to mention the ability to download games straight to console and the rise of online gaming (Fortnite, we’re looking at you). To paint you a picture, GameStop wasn’t anticipating turning a profit until 2023.

But suddenly, huge interest peaked for GameStop. Despite not releasing a new console or introducing a new feature bringing it into the digital age, it became its own blockbuster sell-out. So, you can imagine its surprise over the last couple of weeks when suddenly the US gaming chain reached the dizzying heights of $483.00 on the stock market. To put it into perspective, this time last year, GameStop was trading at $24.63, so you can see the massive attraction from retail investors and hedge fund managers alike.

Hedge fund managers saw this as an excellent opportunity to go short on GameStop and get more bang for their buck…but so did Reddit bloggers. In what has now come to be defined as the stock market’s David vs Goliath, normal everyday retail traders just like you, were (and still are) taking on massive hedge funds who are looking to make millions based on the success or failure of established businesses.

So just how did the Reddit army begin this revolution?

The Bad

Ah, Reddit – the internet’s group chat. You can pretty much find a thread on anything, including taking bets on what will and will not perform well on the stock market. And that’s just what thousands of readers did when they joined the subreddit thread, r/WallStreetBets, a space created by users to allow everyday Ahmeds to discuss upcoming trends, investments, and popular stocks. Okay, maybe not all of them. Some did view GameStop as a “meme stock” – essentially a gamble for the LOLs, that may or may not pay off.

As mentioned, GameStop had become an increasingly popular discussion point on the thread, and that was largely due to its investment potential. Reddit bloggers saw this as an opportunity, not only to grow their portfolio but to apply pressure on Wall Street hedge funds who had been “exploiting” markets in order to make massive gains.

Either way, whether people bought the shares out of a genuine belief it would turn over a profit or for a meme, they were able to make large sums of money and disrupt the investment industry in a shocking fashion.

It’s the stuff movies are made out of – no, seriously. The global following of everyday investors trying to take down big corporations has garnered the attraction of Hollywood, with talks of a film being produced surrounding the economic uproar.

Most recently, Reddit has had to step in. Whilst some moderators on the thread discussed possible movie deals, they soon began to boot out other moderators who questioned their motivation and accused them of secretly trying to profit from the forum’s success. Reddit then jumped in to stop the “takeover” and the company confirmed they had removed some ‘mods’, as they had violated their guidelines.

Based on Reddit’s actions it’s difficult to say what the future of moderating on the forum will look like. The success of r/WallStreetBets was certainly unprecedented, and transparency and free speech are crucial to its success. It’s safe to say however, Reddit is likely to profit substantially from free press coverage, user uptake, and film rights.

The Ugly

Robinhood, a fee-free trading app targeted at millennials, gained millions of downloads and a rush of retail investors looking to purchase GameStop on the app.

Not long after the exponential rise of GameStop, Robinhood clamped down on retail investors buying highly popular and volatile stocks (read: GameStop), thus preventing traders from entering the market and limiting the number of shares individuals can purchase.

Naturally, in doing so, Robinhood gathered negative attention. An investment app created on the basis of democratizing finance was being called into play. Aside from traders, Robinhood received sharp criticism from the likes of Congress. Both Ted Cruz and Alexandria Ocasio-Cortez voiced their concerns on Robinhood’s blockade of investing.

Such restrictions have since been lifted as of February 5, 2021, allowing users to freely buy shares after a tumultuous financial week. Of course, whilst it may have been disruptive and accusations of Robinhood protecting hedge funds have been swirling globally, it is also safe to say we haven’t seen a phenomenon like it before.

Only time will tell what the future holds for Robinhood. An app built to provide fee-free investments, supporting the financial liberties of users has also let those same users down by creating a further barrier to entry.

Whilst traders on the app are now able to buy shares popularized by r/WallStreetBets, the app has received an influx of one-star reviews on Google Play app store. Protestors also gathered outside Robinhood’s HQ in California, as well as the Securities and Exchange Commission HQ in Washington D.C. and the New York Stock Exchange. Further, users filed a class-action lawsuit against Robinhood for alleged market manipulation on January 28, 2021. It was only thereafter, Robinhood began lifting the blockade and allowing limited buys of the stock on January 29, 2021.

Whilst millennials may be obsessed with avocados, soy candles, and Buzzfeed quizzes, they’re certainly just as passionate about morality and economic justice.

why it matters
Amateur traders are continuing to find new fad-stocks to invest in, and discussing key finds on the subreddit thread. AMC and Nokia both felt the shockwave of investor uptake and this pattern is likely to continue with various companies across a plethora of industries. And the phenomenon hasn’t stopped at stocks. Last week alone, we’ve seen crypto and precious metal markets gaining major popularity. Reddit bloggers and what seems like everyone with WiFi access, are attempting to appreciate the value of crypto through mass demand. Only time will tell who comes out victorious.