How perfect is it that GameStop of all things is what is revealing the cracks in our capital markets to the masses? Many of us found ourselves fielding confused communiqués from loved ones about just why everyone was talking about the memeable video game rental chain last week. Apparently, it was about to bring down our financial system?
The truth is not quite as immediately apocalyptic as the many talking head "suits" on financial TV might have conveyed, but there is no denying that the "GameStonk" episode bares real flaws on Wall Street. It's no surprise that two groups most interested in overcoming or exploiting these weaknesses—the Bitcoin and r/WallStreetBets communities—rallied around this incident-turned-movement. Regardless of how the GameStonk saga eventually plays out, the problems it exposed need addressing, and technology may already be providing the solutions.
Most people get what Bitcoin is about by now. It's inflation- and censorship-resistant private digital cash. People like it because it provides an escape from both monetary manipulation that enriches the few at the expense of everyone else and financial deplatforming by intermediaries. It's a technological exit from a financial system mostly oriented to the benefit of the connected.
WallStreetBets (WSB) is a more obscure beast. It's a Reddit community centered around picking stocks on apps like the video game-like Robinhood. They describe it as "if 4chan got ahold of a Bloomberg terminal." They're novice investors, younger, and obviously have much skimpier pockets than professional hedge fund and institutional wealth managers.
But they're not idiots (well, most of them aren't, at least). Actually, there's a good number of professional traders that lurk and post on WSB—the infamous Martin Shkreli being one former (and level-headed) moderator.
And GameStop was not picked because it was funny. Users noticed that the stock price didn't reflect GameStop's otherwise decent financial position. Not only was the stock being shorted, which means that big investors were making bets that the price would go down, but it looked like more stocks were being traded than even existed. This would not just be nonsensical; such apparent "naked short selling" is supposed to be illegal.
The interest surrounding GameStop actually started way back in 2019, when a user (who was later revealed to be a young professional trader) noticed some irregularities with GameStop trading. Heterodox investors like The Big Short's Michael Burry noticed the opportunity for what's called a "short squeeze"; slowly other posters started understanding the strategy and bought up shares, causing the price to inch up.
Hedge funds had a lot of money on the line betting that GameStop stock would fall. With some assists from a few puckish billionaires, WSB bought up the stock to keep the price high—absurdly high, actually: the stock that had coasted for around a few bucks peaked at almost $500 in late January—which would ruin the hedge funds' positions. This is the squeeze.
Although their tongue-in-cheek rallying cry was that they "liked the stock," of course WSB knew GameStop stock was not worth more than, say, Mastercard (~$340). And most of them knew they would probably lose money once the price eventually fell. Like Bitcoiners insist on "hodling" through bear markets, WSB posters encouraged each other to maintain their "diamond hands" and hold the stock no matter what. This was about sending a message.
The message was that Wall Street is absurd and, ultimately, weak. Insiders do whatever they want and get bailed out while normal people—like WSB posters and their parents—lose their houses and jobs. Hedge fund flaks go on TV to trash talk stocks in the process of being shorted; never mind the companies ruined in the wake. All kinds of naked shenanigans go down without anyone in the government much noticing or caring.
This is where the short squeeze was itself squeezed a bit. Strange things started happening when the price of GameStop and other companies like AMC Theaters and Nokia started shooting up. Trading apps like Robinhood limited users' abilities to buy the stocks. There was a forced meme about a silver squeeze. Irate billionaires showed up on TV to sputter about the peasants' audacity in demanding a "fair share." Communications platforms started shutting down WSB communities. Government agents seemed to threaten to investigate retail investors for "market manipulation." Remind you of anything? It looked like the whole of the establishment was coming down to crush the new capital riots.
It's true that platforms like Robinhood could have restricted trading if one of their friends at a hedge fund gave them a call (albeit illegally—the dog and pony show is scheduled for later this month). And it's true that platforms like Robinhood have special relationships with some of the financial institutions that stood to lose (or win!) bigly from the GameStop saga (not everyone on Wall Street was short on GameStop). It's also true that top regulators regularly receive handsome payouts from the firms they're supposed to be overseeing.
But even without these possible avenues for corruption, our financial plumbing all but ensured that platforms like Robinhood would have had to clamp down on the GameStop run. This is because apps like Robinhood don't connect buyers and sellers like a simple broker, and users aren't really spending "their" money when they make a trade.
When a Robinhood user makes a trade, the platform is actually contracting out to a third party "market maker" (like Citadel Securities) that provides the liquidity to cover the trade. Robinhood settles up with them in a few days—two, to be precise, which is why this settlement system is called "T+2." Businesses that participate in this kind of clearinghouse arrangement are regulated by an industry-owned organization called the Depository Trust & Clearing Corporation (DTCC), which sets things like capital requirements to make sure that companies like Robinhood have enough collateral on hand to cover the trades before they're settled up at the clearinghouse two days later. The extreme trading volume for stocks like $GME drew down on Robinhood's available capital, which is why the CEO says the platform had to pause those trades.
In other words, setting aside the potential for corruption, the Robinhood debacle was a problem of both business model—Robinhood users weren't its real "customers"—and technology—the trades don't settle immediately, so this rare event gunked up the financial plumbing of the clearinghouse system.
No wonder the cryptocurrency and WSB communities are so simpatico. When it comes to financial corruption and inefficiencies, Bitcoin and related technologies have a lot to offer.
Bitcoiners were cheering on the financial rebellion from the sidelines—some of them threw in a few satoshis at $GME to support the cause. WSB personalities started tweeting about how Wall Street can only control our finances to the extent that they are connected to the controls of currency—a common cryptocurrency refrain. There's a good deal of overlap in the Venn diagram here: using a currency that is free from the potential for political manipulation limits the hijinks that insiders can pull in financial markets.
Blockchains can help address technological problems with settlement, too. This is the aim of the "decentralized finance" or "DeFi" movement which employs smart contracts and digital assets to facilitate peer-to-peer and instant capital settlement. It's not magic—a poorly coded smart contract could spell disaster for financial trades. But it is very innovative, and DeFi techniques could provide a much-needed jolt to our creaky and sometimes corrupt financial markets.
One of the most exciting things about DeFi is that is provides a way to route around the financial middlemen so central to the recent friction in financial markets. With direct digital asset transfers, there is no "Robinhood" that can be pressured by the SEC or DTCC or even something like Citadel to halt trades. Your assets are yours, so long as you protect your cryptographic key. We should not be surprised to see WSB veterans migrate to the cryptocurrency and DeFi world after their eye-opening lesson in realpolitikal finance.
As I write, the GameStonk rebellion keeps chugging along, although the price is steadily flagging. It seems the energy is mostly lost. But not everyone who participated will chalk this up as a fun prank and move on with their lives. For those serious about addressing the problems with our financial system, the cryptocurrency movement has the values and tools to create lasting change. They are more than welcome to join.
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