GameStop, Dogecoin and Reddit, or how to profit with a meme
The stock exchange is a difficult game for most people. There’s a lot of money on it (a ridiculous amount of money, indeed), and big investors profit with the successes … and failures of others. The cryptocurrency world isn’t so far from it, because it works similarly. That’s why now we have the GameStop and Dogecoin cases, boosted by a mere group of individual investors from Reddit.
This is maybe a historical thing in the global economy, so pay attention, because a group of your average teenagers declared war on Wall Street and the unethical practices in the stock market. In the process, they successfully managed to drive the memecoin Dogecoin (DOGE) to new and unsuspected heights in no time.
There’s a doggy fever now, and a lot of (probably young) people are earning from a meme. How could this happen? Let us explain.
The market works like that, really?
Again, most people don’t know how exactly the economy (and the stock market) works. There are rules and regulations, of course, but everything comes down in the end to the supply and demand. They might sound like something complicated but isn’t.
To sum it up: if something is easy, cheap, and quick to produce and distribute in large quantities (to supply), the need of the people for that product (the demand) isn’t that high, so, the price isn’t high either. It’s a cheap thing because the supply exceeds the demand. On the contrary, if that thing is difficult to produce and distribute, and the people really want it, then the price is higher. Because the demand exceeds the supply.
In the wild territory of stock exchanges, that could change. Mainly, because the stocks are the symbolical pieces of a company, so, they’re not physical, and calculate its real value isn’t an accurate process. Their prices usually go up when there’s good news for the company involved (a new product, release, partnership, etc.). And they go down when bad things happen to the company involved (low sales, scandals, product failures, etc.).
However, sometimes, the supply and demand might not be influenced just for the good or bad news. Sometimes, the people around decides to buy or sell just because they want to from the bottom of their hearts and whims. Sometimes, that buying or selling event joins to many others, so, a lot of money is moving around.
The thing is, when people sell something a lot, that product becomes less valuable. When they buy it a lot, is the opposite. The price can go up and up without control, the more they buy the thing. And that’s exactly what’s happening with GameStop and Dogecoin now.
About GameStop and Short Selling
Wait, wait a second. Are GameStop and Dogecoin that difficult to produce or distribute? There is some good news about them? Why the people have jumped into a shopping fever suddenly? Because the supply and demand have logical reasons, right? Well… no. Not always.
Let’s see. GameStop (GME) is an American company that sells videogames and related products, physically. With the rise of online game platforms (Xbox, PlayStation, Steam, etc.) and the COVID-19 pandemic, they didn’t bear very well. They’ve been suffering millionaire financial losses and they’ve closed thousands of its stores worldwide.
That’s why, in the stock exchanges, the bigger investors (which mean investment companies) have been betting for its failure and making profits with such bets. How’s that? There is a shady strategy in the markets dubbed “ Short Selling “.
Imagine you’re a really big investment company that knows (or expect) that the price of a certain stock (like GME) just go down with time. So, you make a loan to buy these stocks at, let’s say, $17.25 per unit in date #1. You acquire this way 40 million stocks, for example. So, you’re putting there $690m (loaned).
Why the hell? Because you sell the borrowed stocks right away at that initial price ($17.25) and expect that in the future date #2 the price isn’t $17.25, but, maybe, $6 per stock. Then, you can re-purchase the stocks cheaper to pay your loan with less money and keep the difference for yourself. You’d be returning the same 40 million of stocks; not at $17.25, but $6. In conclusion, you’d be earning $450m in few days.
That’s Short Selling and yes, it could go horribly wrong as well. If the price of the stock doesn’t decrease, but increase between date #1 and date #2.
A matter of principles
A good number of investment funds were betting on the GameStop failure this month. They borrowed (and sold) the stocks at the beginning of January, and were expecting them to decrease by the end to make profits of it. And they got highly disappointed (and alarmed) when the stocks didn’t decrease but skyrocketed out of a sudden.
From $17.25 (yes, real price of GME by January 1), these stocks reached $325+ per unit so far. That means a 1,784%+ increase. And that also means, if you took a loan at the beginning of January for 40 million of stocks and sold them for a total of $690m, you’re in problems, because now your debt isn’t even $690m, but $13b. You have to pay an extra of $12.3b. Yikes.
Investment funds like Melvin Capital and Citron Research suffered millionaire losses.And why? Because of a group of Redditors from the subreddit WallStreetBets (WSB). They literally plotted to buy GME stocks massively to pump its price and, more than likely, sabotage on purpose the bigger hedge funds.
The reasons for this would be, more than looking for profits, sheer revenge. The bigger hedge funds are widely blamed for the financial crisis in 2008 because they caused an awful mortgage bubble that left homeless millions of people. Nobody really paid for it so far, and these Redditors seem to try to make amends with it.
The user “ssauronn” explained it with an open letter.
“To Melvin Capital: you stand for everything that I hated during that time [the crisis]. You’re a firm that makes money off of exploiting a company and manipulating markets and media to your advantage. Your continued existence is a sharp reminder that the ones in charge of so much hardship during the ’08 crisis were not punished (…) You can get every mainstream media outlet to demonize us, I don’t care. I’m making this as painful as I can for you”.
They’re not alone by now, by the way. Other groups in and out of Reddit, and even celebrities, have joined to the “party”, as they funnily announced on Twitter.
So… what’s up with Dogecoin and Reddit?
GameStop was just the beginning. These retail investors against hedge funds are also buying other stocks “in disgrace”, like AMC Entertainment (AMC), BlackBerry (BB), Nokia Corporation (NOK), and iShares Silver Trust (SLV). In the middle of all discussion and plans in social media, somebody dubbed “WSBChairman” on Twitter wondered if Dogecoin has ever reached the dollar. And it was an explosion.
He’s not actually related to the official subreddit WallStreetBets (WSB) but managed to plant the seed of new ATHs for DOGE. Suddenly, this cryptocurrency belonged to the movement created by WSB. Other groups in Reddit, like SatoshiStreetBets, started to promote the purchase of Dogecoin as well.
Elon Musk, known for having a predilection towards this memecoin, made a couple of low-key tweets about it, boosting the price even more.
The second one, commented by even Bitcoin Magazine, alludes to a previous tweet by Musk himself in July 2020.
Maybe he bought some of it, or maybe not. Who did it for sure was the celebrity Mia Khalifa, and a lot of people before all this event, as a joke mainly. Now they’re earning juicy and unexpected returns thanks to a meme.
We must note DOGE started this week at $0.008 per coin. According to CoinMarketCap, this January 29, 2021, reached a new All-Time-High (ATH) of $0,077 per unit. That means an 862%+ increase in a couple of days. It already suffered a correction and descended to $0.049, but probably there is more to come soon. Especially considering that its market capitalization is over $6.2b, and apparently about to enter in the top 10 of the most important cryptos for it.
In any case, this is a financial episode that worth to be remembered. After all, that’s the raison d’être of cryptocurrencies: giving the power of money back to regular people.
Featured Image by Aranami / Flickr
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Originally published at https://blog.alfa.cash on January 29, 2021.