The GameStop Frenzy is a Giant Middle Finger to Wall Street

While elite hedge fund managers were analyzing elaborate spreadsheets via private Zoom meetings, an army of aggressive amateur investors was cooking up a stock market saga that may change investing psychology forever.

It's been almost impossible to ignore the buzz about GameStop. You know, the video game retailer where you bartered to get $3 for a used Xbox or Nintendo game so you could buy a slice of Sbarro Pizza.

It's a David-and-Goliath story, with seasoned New York Wall Street execs pitted against jaded millennials hell-bent on upending the system (and making a profit along the way). So far, David is winning the battle—but is doom around the corner? And more importantly, why is any of this volatility happening in the first place?

The CliffsNotes Version of the GameStop Frenzy Saga

Let's throw out the textbooks and explain this stuff like we're five years old:

Professional investors on Wall Street bought shares of GameStock under the assumption that those shares' value would decline. This is called "shorting." However, if the value of those shares went up, investors would have to buy shares to cover their losing bids. This is called a "squeeze."

Analysts have dubbed the recent situation with GameStop "The Big Short-Squeeze." Instead of declining, as predicted, GameStop Corp. stock value swelled 1,700% in a matter of days. One year ago, the single share price of stock in GameStop cost about $4. One Friday January 28th it closed around $328, and the price has declined to around $100 as of February 3rd.

The result? Short-sellers lost nearly $20 billion while amateur traders made quick cash (one Redditor posted that he'd paid off $23,000 of dollars in student loans with his GameStop gains).

The meteoric rise in GameStop's stock price was the handiwork of the subReddit r/WallStreetBets, a social media community of nearly three million people, most of whom are young day-traders who detest the "suits" on Wall Street. 

After realizing the short-sellers banked on GameStop shares failing, they engaged in a coordinated effort to pump money into the stock, forcing it to halt trading multiple times and causing a major headache for traditional investors.

"It's dramatic, and you don't see this magnitude very often," said Nick Colas, the co-founder of DataTrek Research. "But when it happens, it's spectacular."

But why, out of all stocks, would these bloodsuckers bet their money on a dying brick-and-mortar chain?

The Revenge of the Retail Trader

GameStop, along with other failing businesses such as BlackBerry, Macy's, and AMC, fall into the category of "meme stocks" or "stonks" — a stock in which interest is based on culture, as opposed to financial data. Pumping up (and profiting from) a meme stock is a way for retail investors to give a giant middle finger to institutional investors.

"Your contempt for the retail investor (your audience) is palpable, and if you don't get it together, you'll lose an entirely new generation of investors," Reddit user, RADIO02118, wrote in an open letter to CNBC. "We don't have billionaires to bail us out when we mess up our portfolio risk, and a position goes against us. We can't go on TV and make attempts to manipulate millions to take our side of the trade. If we mess up as bad as they did, we're wiped out."

Some experts weighed in on the psychological dynamics at play between the haves and the have-nots.

"What you're seeing is a pushback against the establishment," said Chamath Palihapitiya, CEO of Social Capital. "A lot of these kids were in grade school, and high school when [the 2008 financial crisis] happened. They lost their homes, their parents lost their jobs, and they've always wondered: 'Why did [Wall Street] get bailed out for taking enormous amounts of risk, but nobody showed up to help my family?'"

Bloomberg columnist Matt Levine suggested that one possible explanation for the frenzy could be "utter nihilism" on the part of Redditors, many of whom have nothing to lose in the midst of the crippling pandemic.

"It's a perfect storm at a time when lots of people are hurting, interest rates are so low, inescapable student loan debts loom, and every major institution has caught Ls during a /global pandemic/ over the last year," tweeted Reddit co-founder Alexis Ohanian. "This is something to believe in."

What Happens Next?

As of Wednesday, GameStop's stock price hovering around $100, and regulators stepped in to halt the momentum. Robinhood, the retail trading app, restricted new purchases of GameStop stock. r/WallStreetBets was locked (only to be reopened a few hours later). Discord banned WallStreetBets outright.

Waging war on Wall Street might seem empowering in the short term, but the risks of financial ruin are looming.

"This is tremendously dangerous for retail traders who haven't traded before," says James Royal, a senior investing reporter at Bankrate. "The stock can drop precipitously in a matter of seconds or minutes. If you have no experience dealing with that kind of thing, you will lose your money very, very quickly."

Regardless, all signs indicate that traders on r/WallStreetBets are sticking to their guns.

"You might be a financial expert; I am a survival master," said one Redditor in r/WallStreetBets. "If you think the prospect of losing the few hundred dollars I have in GME is going to scare me into selling...you couldn't be more wrong."