The surge in shares of GameStop in the last days of January it caused an unprecedented frenzy. Anyone in the gaming world has been exposed to terms like hedge funds, shorting e short squeeze, without the time to understand what exactly they were.
This tsunami of information has clouded events, and it is still not clear to most people who came out on top. Did Reddit Defeat Capitalism? Is RobinHood controlled by the strong powers? Are everyone on r / wallstreetbets millionaires now? Legitimate questions, to which we will try to give answers that any gamer can understand.
Because most of the articles that attempt to explain the situation at the moment they are aimed at a “normal” audience. But no one is explaining the situation to those directly involved, people who maybe follow r / wallstreetbets and who certainly, in one way or another, are linked to the culture of gaming.
We like to think we don't need the tutorials. But then we regularly find ourselves hitting random keys and discovering after twenty hours of play that if you press circle twice you double jump. So bear these paragraphs, to understand what we are talking about.
I will assume that everyone knows what an action is and how the law of supply and demand works. That said, here it is four simple concepts to move forward in this game smoothly.
Investment funds and hedge funds, minions and bosses
Investment funds are institutions that people give their money to to invest. Much of the funds are used to have a small, fairly secure income, but are tied to a certain market. If that market is bad, the bottom is bad too. Unless the fund in question is a hedge fund.
In Italian we call them hedge funds, but literally means hedge bottoms. They are funds of funds, complex investment systems that serve to risk nothing. To scale things, if a hedge fund loses 2% of its value in one year it is a disaster. If normal funds are minions, hedge funds are the bosses with a lot of life.
Short selling, or short selling, is the favorite move of the bosses
If the hedge fund is the boss, short selling is their favorite move. It's borderline cheating stuff, where you make money from stocks that are doing badly. Here's how it works: the great sharks of Wall Street (write them down, they will come back) have a lot of different actions, and some of them go wrong. Instead of despairing, they give them to a broker (guy who invests work) who lends them to someone, usually a fund.
This is where the actual short selling takes place. The fund sells these shares, let's say at 1000 euros, waits for the price to drop and buys them back at 800. So he has the same shares that the broker had lent him and 200 euros more. The broker keeps a portion of the money and returns the shares to its owner with a small profit.
The short squeeze, the counter move that can defeat the boss
And what if during a short sale the price goes up instead of going down? The fund loses us, quite simply. Short selling is risky because it has a potentially infinite loss. They are a move that does a lot of damage, but lowers the boss's defenses. And if you want to take advantage of this momentary weakness, you have to use the short squeeze.
Imagine that after a fund has sold its shares short, instead of falling, those shares soar in value. Now the fund wants to buy them back as soon as possible, to limit losses. But if you buy the shares you increase the demand for them, and therefore you increase their value.
Funds are cornered: to limit the damage they have to buy, but if they buy they do more damage. It's a vicious circle, like a very difficult combo which Reddit somehow managed to execute. And it took away from a particular fund 15% of life. In a week.
The clearing house, the healing potions
In all these operations the broker is the individual who risks the most. He is in the middle, he buys and sells stocks even with his own money, and if things go wrong he can even go bankrupt. For this there are clearing houses, o clearing house. They are crates where brokers put a certain amount of money in order to have a reserve of liquidity in case things go wrong.
Like a collective healing potion that brokers can tap into when they are beaten up by the market. But obviously not everyone puts the same amount of money into these boxes. The more risky your job is and the more shares you buy and sell, the more money you have to put in.
Okay, we're done, now let's take action.
Reddit against the boss, how it really went
The narrative I see prevailing on the internet is this: Reddit was kicking short squeeze barrel funds along with its NPC, the Robinhood brokerage app. But when all was going well, Robinhood blocked all transactions, betraying the redditors and selling himself to the boss. Mouse 10 souls betrayals, market manipulation, all very angry. But the reality is different.
To use the short squeeze and defeat the boss, Reddit needs an NPC, a broker who buys GameStop stock. in conclusion It takes a lot of mana to cast this spell, and that mana is provided by Robinhood.
The Robinhood app is a rather small and quiet broker normally. He is not a level 100 NPC, he is the wizard you find in the first city of the game. So he pays little money to his clearing house. All of a sudden, however, he started doing short squeeze, a very risky operation.
So his clearing house, seeing him engaged in a high-risk operation, asked for guarantees, which means more money. For this reason, Robinhood has prevented him from continuing to buy GameStop stock. He needed time to find the money to give to his clearing house.
She went to her shareholder banks and funds to ask for help, and they gave it to her. So in fact Robinhood was paid to continue buying stocks, not to quit. In short, you are mistreating a poor NPC who tried to help you.
Just in the hours Robinhood has lost finding money to put in his clearinghouse, drinking his healing potion, even the boss took care, and another misunderstanding was born. The fund that has injected liquidity into those most affected, in short, the healer of the boss, is called Citadel. Some have noted that Robinhood sells its users' operations information to Citadel Security, and concluded that our NPC is actually working for the enemy.
This business model, selling information, is perhaps not exactly 100% legal, there have been investigations underway for months. But the problem is that Citadel and Citadel Security are not the same. They only have the same founder, but they are distinct entities. So no, Robinhood doesn't work for the enemy. At least not in this case.
However, it is reasonable to think that the result was a victory. The fund was defeated, Reddit made a lot of money, Wall Street is afraid of the little ones. Victory of the people!
Eeehhh… not really.
The secret Boss
Do you remember the sharks from the tutorial? Those who own the shares that are short-sold? Here, now look at the whole story from their point of view.
They've gone overnight from having huge amounts of stock worth nothing, to owning significant parts of one of the richest stocks at the moment, doing nothing. They are the real boss.
They, who while everyone was buying, they sold everything for $ 500 a share, making billionaire profits. In short, by defeating the boss, Reddit has summoned a very powerful secret boss, who is about to annihilate everyone.
When these sharks make their move, and partially have already made it, GameStop's title will return to the value it had before this speculation. A value that reflects the terrible conditions of the company, which has been in crisis for years.
And all meme-loyal redditors "Hold to the Moon" they will not sell and will end up with a lot of stocks that are worth nothing. Here the real problem arises, here the game becomes real.
Many of the small investors who got on the GameStonk train used what is called leverage in English. In fact, they got into debt in order to increase the scope of their operations.
The logic behind this behavior is simple: you see an opportunity but you have relatively little money, then you borrow a lot, with the prospect of multiplying them by playing on the stock exchange and then returning the loan.
But now the secret boss is about to disintegrate the earnings of these people who will find themselves in debt up to their necks. They will lose their savings, and not to some ideal as some go around saying these days, but for a meme.