It seems like the whole world has gone crazy. Why is everyone talking about GameStop stock, squeezes, and Wall Street? We're gamers, we're supposed to be gaming! Anyway, we break down everything you need to know about the GameStonk GameStop controversy. Time to get into some economics!
It all started in a little subreddit called r/wallstreetbets. It's basically a spot on Reddit where people gather to talk about enriching themselves with riches. Pretty boring from our perspective, but hey, that's why we're broke as f**k!
So, What the Bloody Hell Happened?
Why r/wallstreetbets chose GameStop in particular is not entirely clear. GameStop was in crisis due to the pandemic and is certainly happy about the attention. In the subreddit, people have been betting on GameStop shares over and over again for several months, driving up the prices. At the highest point, the value of a share was over $400. For comparison, at the beginning, it was around $4. Well, that's a whole lot of dough!
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How Could This Happen?
The traders at r/wallstreetbets are using a strategy that is actually super sophisticated. Normally, you buy stocks hoping that the price will rise, and you cancel them for more money. But there are also cases where bets are made on a falling price. Now, it's time for some economics...
In this case, many shares are bought with borrowed money (e.g. through trading platforms), and immediately sold again. The share falls in the course, and one can buy it back favorably, thus making a profit. 1, 2, profit! This is also called a “short”. On Reddit, however, high purchases ensured that the price continues to rise. This forces people who use the explained strategy to sell their shares at a high loss, or a "short squeeze". The constant trading back and forth causes the share price to rise rapidly.
Why Is This a Problem?
First of all, the whole thing sounds like a funny meme. “Suck it, Wall Street, we'll take your money and push GameStop!” This makes it all seems like a laughing matter, when actually, the whole thing is not without danger. This is because such sharp increases in stock prices can create bubbles in the market. If these bubbles get too big, the whole market can collapse, then risks a new financial crisis. Well... in this case, it would just make the current crisis bigger, a global recession is nothing to be sniffed at!
Right now, everyone is so excited about their performance, that they think it will just keep going up. But, it won't. The bigger they are, the lower they fall, and the stock is already way back down. Those who don't get out in time risk losing millions, and Politicians also want to intervene: in the US, some are already working on solutions.
The really problematic thing about this, is actually that there is public speculation about who is going to invest in what. This skews the bets, and more and more people get in without really know what they are doing. When the bubble bursts, there will be a lot of losers. Let's just hope those losers aren't us normal folks...
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