GameStop is an American video game, consumer electronics, and gaming merchandise retailer and last week it was the talk of the town. To summarize what happened, a group of users on the r/WallStreetBets, a Reddit forum where participants talk about stock and option trading, noticed large short positions on Gamestop, almost 140% of the available stock. Hedge funds had borrowed and sold more shares than the company issued, an illegal practice known as naked shorting – selling short shares that have not been affirmatively determined to exist. The forum’s users organized and began buying Gamestop, driving its price to a peak of $469 on Thursday, a 1,700 percent rise since December. In just a few days, the company’s market value jumped from $2 billion to $24 billion. GameStop wasn’t expected to return profits until 2023, so hedge funds shorted the company’s shares, betting that its price was going to drop. With the price increase some of them lost their shirts. Hedge fund Melvin Capital Management lost 53% on its investments in January because of the GameStop rally, forcing it to close its position and its backers (Citadel and Point72) to pump $3 billion into the fund to keep it afloat. What happened with GameSpot is not something that happen overnight. It’s been brewing over the last decade, with several trends developing and leading up to this. The norm of big players sticking it to smaller players and profiting at their expense was turned upside down. For the first time an army of small investors beat Wall Street hedge funds and banks at their own game. What happened with GameStop is testament of a new reality that is underway, changing the face of financing.
Ilias Louis Hatzis is the founder and CEO at Kryptonio, a “keyless” non-custodial bitcoin and cryptocurrency wallet, that lets users manage bitcoin and crypto, without private keys or passwords.
In September 2020, GameStop’s stock started rallying after trading around $5 for a little over a year, because dog food tycoon, Ryan Cohen, purchased a 10% stake in the video game retailer. But, GameStop’s recent rally was breathtaking. The shares of the struggling mall-based video game seller skyrocketed, after a band of millions of small retail investors on Reddit decided to teach Wall Street a lesson. On January 26, Elon Musk fuelled the fire even more, tweeting “Gamestonk!!” with a link to the WallStreetBets forum on Reddit and receiving more than 250,000 likes. In the process, nine investors made $16 billion.
This whole WallStreetBets/GameStop affair, reminds me of the “Garry Kasparov versus the World“, a chess game in 1999. Playing white, Garry Kasparov faced the rest of the world, with the World Team moves decided by plurality voting. This time around, the highly compensated and expert hedge fund analysts and traders, who trade stocks for a living, were outsmarted by individual investors who are often referred to as “dumb money.”
The other big story related to the GameStop story was Robinhood. The trading platform, halted purchases of GameStop shares and essentially locked out potential new buyers and forced existing holders to sell. A lot of people were outraged, because they felt Robinhood was protecting big hedge funds and taking advantage of the little guy. Robinhood was not alone. TD Ameritrade, E-Trade and others followed suit, making it very difficult for retail buyers to buy GameSpot’s shares.
The truth is that Robinhood was protecting big hedge funds.
The message they sent to their users was loud and clear: ‘It’s okay for the little guys to get burnt but not the big guys.
Robinhood’s biggest customers are large market makers and hedge funds. While Robinhood does not charge commissions when you and I trade, they do make money by selling our order flow data to large hedge funds. When they started, Robinhood like other fintechs set out to tackle financial inclusion. They even decided to communicate their USP† using their name: to redistribute wealth from the rich to the poor. But in reality, Robinhood is taking the order flow from the poor and selling it to the rich. The customer confidence it was building for 7 years has now evaporated. It’s also faces heat from Washington, as lawmakers accused Robinhood of market manipulation. From where I stand, it has royaly screwed up its brand promise, alienated its customer base and jeopardized its upcoming IPO.
So now what? Where do we go from here?
The story of GameStop is a lot bigger than the fate of a single stock.
To be fair, GameSpot is a horrible investment in a digital world, that is locked down because of the Covid-19 pandemic. GameStop faces a fundamental problem, like others before it. Remember Blockbuster videos? Why go to the mall to buy a video game when you can easily download it online?
It’s clear that the events that transpired are a catalyst for bitcoin and crypto adoption. When Robinhood halted its customers from trading GameStop, it opened the floodgates to decentralized finance. Shutting down trading to allow someone to cover a short position, breaks the integrity of the markets.
Decentralized Finance (DeFi) is the solution.
DeFi levels the playing field enabling the same access to trades, credit lines, yield and leverage no matter who you are. While Robinhood halted GameStop trading for small individual investors, companies like Fidelity were still able to execute trades.
In a DeFi world, digital assets trade 24/7/365 without manipulation or intervention. Ethereum has no single owner and no one entity can exercise the same level of control that Robinhood did in the case of GameStop. DeFi removes the gatekeeper and gives you full control to decide what to do with your money.
Regardless of who you are, rich, poor, black, white, yellow, smart or dumb you will always be able to participate in the markets. This means you can trade freely in an open market, no one can “temporarily halt trading” on a particular stock or stop you from investing. Your assets are yours and yours alone, and no bank or entity can suddenly freeze them or confiscate them away.
DeFi has exploded in 2020 and ushered innovation to the market that will continue to grow. There is still a lot of work that needs to be done, but the vision is there. Decentralized protocols can and will change the way we view and interact with financial markets.
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