*This is a guest post provided to us by Expensivity. Thoughts and opinions are theirs alone.
When social media came out, most people used the technology to stay in touch with friends and family. Years later, many individuals are comfortable forming communities of strangers whose only connection is their online forum activity. While their community is online, actions taken as a part of it can happen offline as well. One example is Wall Street Bets, a Reddit-based group that chose to pursue GameStop (GME) stock as a means to punish the hedge fund operators.
What were these hedge funds doing? They were betting that GME stock would decline as a company due to their outdated business model. In a process called shorting, these funds sold their shares with the intent of repurchasing them at a lower price. They also did business on margin (with borrowed money) and engaged in options trading, meaning they paid for the right to buy stock later (and at a specific price) instead of right away. While these hedge funds could have made a lot of money had their predictions been correct, GME stock rose to meteoric heights instead. As there is theoretically no limit to how high a stock can rise, losses in shorting can be infinite.
Melvin Capital, the leading hedge fund participating in this activity, lost $6.6 billion when GME stock rose from $18 to a peak of $483. Their total value is $12.5 billion, making this loss a terrible one in absolute and relative terms. They weren’t the only losers, either; short-sellers had to sell other stocks to raise cash, leading to the worst stock market day in three months on January 27th. These events were made possible by modern communications technology. Wall Street Bets is a modern phenomenon, one that regulators don’t have a complete understanding of yet.
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