After a group of amateur investors raised the price of GameStop, a $13 billion hedge fund has been left with huge losses.
Reddit users reportedly increased the video game retailer’s share price tenfold in just a few weeks.
Investment management company Melvin Capital had betted against GameStop by short selling its shares, meaning it stood to gain if the price went down and lose if it went up.
However, Reddit users intervened so that Melvin Capital were the ones hit by huge losses instead, reported The Independent.
The pandemic hit many retailers hard, GameStop included, leading the 37-year-old business to plan to close 450 of its stores, according to The Guardian.
Following a thread on Reddit called ‘wallstreetbets’ that has more than two million subscribers, GameStop’s price went from $17 at the start of the year to almost $150 per share when trading closed yesterday, January 26. At one point in April 2020, the stock price was as low as $3.25 each.
Apparently it then doubled again in after-hours trading after Elon Musk tweeted, ‘Gamestonk!’, As a consequence, those who betted against GameStop have collectively lost $5 billion, according to data analytics company S3.
It’s thought that GameStop investors used an app called Robinhood to buy the cheap stock to seize what they saw as an ideal buying opportunity.
Meanwhile, Wall Street saw something else and decided to bet against GameStop, thinking it would give them a chance to ‘short’ an ambitious bet against Amazon that they believed was bound to fail, reported The Guardian. Short stock investments are a bet that the company will decline in value while the stock is leased elsewhere.
Shorting stock is quite risky as it allows investors to essentially lease stock for a period of time and then repurchase them to give back to the company. Many Wall Street fortunes are believed to been made this way, however this didn’t end up being the case at Melvin Capital.
But why GameStop, I hear you ask? Industry analyst and consultant Michael Futter explained to PC Gamer that Reddit users became invested in this project just to mess with Wall Street.
The WallStreetBets subreddit (largely daytraders) decided to mess with them and make some quick money. They aren’t interested in GameStop as a company. It could quite literally have been ANY company.
As of this morning, 71.66m GameStop shares were shorted, worth about $4.66 billion. As per The Guardian, year-to-date, those bets have cost investors about $6.12bn, which includes a loss of $2.79bn on Monday, January 25.