Gamestop’s share price has gone from $42 a week ago, to $387 this morning premarket.
As you may already be aware, this was started by a reddit forum called Wallstreetbets, a group with which I am mutually acquainted.
They rightly identified a market issue – namely, that a hedge fund had short sold GME to the point where the stock was worth less than the book value of the company. (Short selling, for the uninitiated, is a bet against a company. The short seller borrows stock to sell with the intention of buying the stock back later and returning it once the price has fallen.)
So they pounced, and started buying up the stock left and right. This causes what’s known as a ‘short squeeze,’ where anyone who has shorted the stock has to buy it back before the price goes higher and they lose even more money. This buying, of course, sends the price even higher.
I’ve seen this identified as retail investors taking on Wall Street. While I don’t see hedge funds as the ‘bad guy,’ I certainly won’t cry over their hefty losses, since supposedly they’re sophisticated enough to understand the risks – though I doubt internet trolls were built into their calculations.
This has even been described as a shift in power from Wall Street to the masses.
It’s not. The reality is it’s a whole lot of people who threw money at something as a joke and it’s about to blow up in their faces.
The problem here is that the joke went too far. What started out as a short squeeze has turned into a bubble. The retail investors sent the stock soaring deep into overvalued territory.
Bubbles pop. Maybe today, maybe next week, but it’s going to happen. The first few people to cash out will do fine, but all those ‘diamond hands’ who refuse to sell are going to be shocked at how much of their investment they are going to end up losing.
I can’t tell you if it’s going to be today, next week, or next month, because I can’t predict how long it will continue to be amusing to the thousands of people who jumped on the bandwagon. But I can tell you that it’s going to crash, hard, and the ‘masses’ are going to lose a lot of money.