Wall Street

Why WallStreetBets and Bitcoiners Got So Excited About GameStop

Some of them like the stock, but all of them think our financial system is broken.

|

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.

Here was an opportunity for WSB to beat the hedge funds at their own game and cost them a dozen billion or so in the process. Market manipulation? No, "we like the stock :^)."

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.

NEXT: The Not-So-Peaceful Transfer of Power

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  1. Electronic financial transactions without middle men is the holy grail at the moment. Removing middle men in general is becoming the holy grail, because without middlemen there can be no gate keepers.

    1. ●US Dollar Rain Earns upto $550 to $750 per day by google fantastic job oppertunity provide for our community pepoles who,s already using facebook to earn money 85000$ every month and more through facebook and google new project to create money at home withen few hours Then try this…… JOB DETAIL

      1. ░A░M░A░Z░I░N░G░ ░J░O░B░S░
        I basically make about $8,000-$12,000 a month online. It’s enough to comfortably replace my old jobs income, especially considering I only work aboutQEI 10-13 hours a week from home. I was amazed how easy it was after I tried it copy below web.

        COPY HERE———->> GoOgLE CaSh 1

    2. I am making a good MONEY (500$ to 700$ / hr )online on my Ipad .Last month my pay check of nearly 30k$.This online work is like draw straight-arrow and earn money.Do not go to office.I do not claim to be others,I just work.You will call yourself after doing this JOB,It’s a REAL job.. ….You can check more here.

      1. {USA PEOPLE ONLY ]
        By following this simple steps on this website, you can bring from
        $5000-$8000 of extra income every month…
        All you need is a computer and a internet connection and you are ready to start.
        Learn how to make a steady jybr income for yourself on following web adress.for more info visit any tab this site Thanks a lot.

        open this link………EARNING SEASON ON

    3. Joe Biden announced Job opportunity for everyone! Work from comfort of your home, on your computer And you can work with your own working hours………. ….You can check more here.

      1. Google pays for every Person every hour online working from home job. I have received $23K NUJ in this month easily and I earns every weeks $5K to 8$K on the internet. Every Person join this and working easily by open just open this website and follow instructions
        COPY This Website OPEN HERE….. Visit Here

    4. And then the bubbles will fly! Seriously, the middlemen slow down the process for the uninformed who want to get in on the latest bubbles. They’re not there for that purpose, but it’s a nice side effect.

      There’s quite a bit of economic literature on “middle men”, and it’s clear they are a desired part of markets despite being universally derided by the non-economist.

      The use of the word “gatekeeper” implies they prevent entry to the market. This is not true. It’s easy enough to create a trading account, and anyone with an account can trade without asking for permission. The “gatekeepers” are there as conveniences. People who know more about what they are doing than those who use them. If you think you are smarter than the “gate keeper” then just don’t use them. I have a friend who has been day trading for decades, by himself, without needing anyone’s permission.

    5. well come to the online job and earn many dollar click this link……….USA HOME JOB.

    6. Why Wall Street Bets and Bitcoiners Got So Excited About GameStop
      Some of them like the stock, but all of them think our financial system is broken……… MORE DETAIL.

  2. Post T for extra crispy tendies!

    1. Google pays for every Person every hour online working from home job. I have received $23K NUJ in this month easily and I earns every weeks $5K to 8$K on the internet. Every Person join this and working easily by open just open this website and follow instructions
      COPY This Website OPEN HERE….. Visit Here

  3. “This would not just be nonsensical, such apparent “naked short selling” is supposed to be illegal.”
    As far as I understand no naked short selling occured. I think your definition of naked short selling as “trading more stocks than even existed” is an incorrect understanding of the term – in fact, according to the link you provided naked short selling is where “the seller does not borrow or arrange to borrow the securities in time to make delivery to the buyer within the standard three-day settlement period. As a result, the seller fails to deliver securities to the buyer when delivery is due; this is known as a “failure to deliver” or “fail.”” In the case of gamestop the shares were actually borrowed from the brokerages and sold – just an ordinary legal short sale. The same shares can then be borrowed from the new owner and sold again by another short seller. Nothing to see here folks.

    1. The same shares can then be borrowed from the new owner and sold again by another short seller. Nothing to see here folks.

      Yep, nothing to see here, just hedge funds trying to drive Gamestop out of business through a short squeeze, an online brokerage connected to the current Secretary of the Treasury via Citadel Securities trying to suppress the buyers attempting to execute the counter-squeeze, and the corporatist media/government industrial complex expressing disgust that such people would have the audacity to interfere with the normal Wall Street shenanigans.

      1. Not virulently opposing this market manipulation by hedge funds and winked at by the government sure is going to do a lot to increase faith in the market.

        Reason, as usual, is on the wrong side of libertarianism.

        1. Of course! The correct libertarian answer is to imagine conspiracies around every corner.

          1. It’s not a conspiracy if they actually are gaming the system to line their pockets.

      2. The hedge funds were trying to create a short squeeze on a stock they were shorting? What? Do you have any idea what you’re talking about?

        The hedge funds shorted GameStop; they borrowed shares of the stock and sold them in exchange for a promise to return the borrowed shares at a later date in the hopes that the price of GameStop would decline in the meantime and they’d make a quick buck. Some attentive people on WSB noticed what was going on and created an artificial shortage of the stock by encouraging mass groups of people to buy and hold the stock, creating a scarcity of shares for sale. This is the short squeeze, created by WSB and /biz/ not the hedge funds. And it wasn’t The Man putting the screws on Robinhood, it was Robinhood’s own business model which necessitates keeping a lot of cash on hand to cover the trades its users order. Creditors were right to ask it to bulk up on cash for all the reddit hype going on and so their hand was forced: borrow a bunch of money they can’t afford in order to cover the risk or limit trades on GME. That limitation came inhouse from Robinhood itself. Notice that no other major platform was limiting trades on meme stonks, and even Robinhood wasn’t limiting the ability of people to sell. Just their ability to buy even more and increase Robinhood’s risk.

        In the end, the hedge funds lost a ton of money on a bad bet and everyman redditors lost a ton of money too after being conned into “buy high sell never” idiocy. The manipulators on WSB and /biz/ made out like bandits and it is that kind of behavior that the SEC is looking to put the screws on.

        1. Robinhood wasn’t limiting the buying for institutional firms, just recreational people. It is a blatent double standard and reeks of collusion on the side of citidel

        2. See, this is what differentiates normal people from the “libertarians” who come here to post.

          Normal people see what Robinhood did in limiting transactions and say “huh, that’s weird, I wonder what the reason for that is.”

          The “libertarians” who come here, see what Robinhood did in limiting transactions, and immediately leap to the most conspiratorial conclusion possible.

      3. The share price of a company has no direct connection to how well the company is doing from a profit and loss standpoint. Indirectly a low share price could impact the company by increasing how much the share pool would have to be diluted if it wanted to raise funds by issuing new shares, or it could also make the company an easier target for hostile takeover, but a low share price cannot by itself “drive a company out of business”.

  4. The problem is that most people don’t understand what the stock market is. It’s not “The Market” as in a proxy for the entire economy. It’s not even the monopoly on stock sales. It’s just one of many local market for selling shares of companies. New York has one. Chicago has one. London has one. Etc. I could sell my stocks on the street corner if I wanted to.

    There’s also very little correlation between an immediate stock price and the long term value of the company it represents. This is the hardest for people to understand. It’s a very ephemeral market trading shares in otherwise stable companies. I worked for a company where every bit of news caused its stock to dip. Bad news caused a dip. Good news caused a dip. Rollout of new product caused a dip. Didn’t matter. But the trend was clear, slow and steady increase in value. The immediate stock price was bullshit.

    Most people understand stock trading to be gambling. It is. What they tend not to understand is that stock prices do NOT measure the value of a company, but rather the aggregate guesses as to what it might be valued at some indefinite future time. Heck, to be cynical it’s just speculating on the speculation.

    Imagine betting on what other people are betting. Imagine a giant game of Roshambo. That’s the stock markets.

    Trading is not investment. Repeat, trading is not investment. An investor evaluates a company for its long term prospects. A trader is only gambling on other people’s gambling.

    Here’s the last piece of the puzzle: Most traders are playing with OTHER PEOPLE’S MONEY! Trading is crazy and stupid because there’s no skin in the game. Couple that with government routinely bailing out big traders, and you have a mess.

    Okay, a lot of exaggeration there. But it’s close. The stock markets do serve the purpose of valuating companies. But it’s very chaotic in the short term, and most of what people see and shit their pants over is the short term.

  5. Eh, us “bitcoiners” didn’t really get excited, we were just happy to see Wall Street take the mask off so everybody could see what we’ve been saying for years.

    The “getting excited” part comes because I can take the next couple years off…….

    1. And the reasonable bitcoiners and crypto owners recognize that bitcoin doesn’t inherently or entirely solve the problem. Well before there was a Robinhood, there was a Mt. Gox and anybody with even a basic undertstanding of crypto knows that a ZKP means you don’t have to know what exact encryption was used or what route was taken if you control or have access to the information at both ends; which the blockchain, by definition (at least in bitcoin’s and many others’ case), gives to anyone/everyone.

    2. There never was a mask. There is nothing new happening here that hasn’t happened dozens of times before.

  6. ” But they’re not idiots (well, most of them aren’t, at least). ”

    The view from the disaffected aisle.

    1. You’ve been conspicuously absent. Getting upgrades from your handlers?

      1. Artie’s been over at Volokh shitting up that forum.

  7. Most calls to use blockchain to “revolutionize the XYZ industry” are irrational fantasies that do nothing more than advertise the writer’s ignorance. This article, on the other hand, actually made a blockchain claim that might have legs. What if a company offered its stock through blockchain transactions? No dealing with corporate bankers and their commissions. No need for subsequent buyers of the stock to deal with stockbrokers and trading exchanges. No (or at least, less) interference from the SEC.

    There are probably a dozen reasons why this might be a bad idea but it’s at least plausible. Maybe blockchain really does have potential beyond just currency transaction tracking.

    1. There are probably a dozen reasons why this might be a bad idea but it’s at least plausible.

      It’s just recreating the problem. Visa executes something like 1,500 transactions every second. Your average broker’s lag/latency is roughly equivalent. BTC, OTOH, has something like a 4 transaction/s throughput. ETH has something like 20. And while it’s tempting to see ETH as being 5X faster than BTC and think you can just jumble the protocol around and get to 1.5K or close, the bigger part of the problem is with the distributed nature of DeFi (and distributed computing) itself. You incur an overhead that centralized processing fundamentally doesn’t. Moreover, attempts to bypass the decentralizing issue undermine the decentralization and the fidelity.

      (Part of) The problem with Gamestop was that the company didn’t actually do anything to even double its value. Already, crypto exchanges update the value of a currency faster than the blockchain can update. So, how does a currency change value faster than a transaction can be executed? Hint: It has nothing to do with cryptography or decentralization.

      Again, not saying you couldn’t build a functioning exchange, I’m just saying that it won’t outperform, or there is no reason for it to outperform, even currently-existing exchanges in any real objective or quantifiable manner.

      1. And while it’s tempting to see ETH as being 5X faster than BTC and think you can just jumble the protocol around and get to 1.5K or close

        It should also be kept in mind that even if you did just jumble a blockchain around and get to 1,500 trans/s, that doesn’t necessarily displace anything and only serves *existing* demand. If the blockchain/protocol makes it easier for a company to get listed and traded, even that throughput could/would be woefully inadequate.

  8. Gamestop was a shitty company with a shitty business model, terrible sales practices, ghastly employee relations and was rapidly headed towards obsolence due to its reliance on selling physical media. If you want to be saddened, read up on their Circle of Life sales policy which punished staff who didn’t aggressively push customers to buy second hand games.

    So all the Gamestonkers did was reward a shitty company and their shitty management (who probably got shares as part of their compensation scheme).

    No amount of “fuck you hedge funders” can make me overlook that.

    1. But the marginal utility for the kids who found losing a few hundred in “govt” stimulus money to take out a few Street Hedge fund scumbags was worth is in their mind. It was a good investment..

  9. I am not so sophisticated.

    Invest in a solid company at a decent price set to grow over time.

  10. I thought the more potentially enlightening development was how quick the self-styled protectors of ‘main street’ little guys against ‘wall street’ big-wigs were so quick and eager to leap to the defense of . . . the ‘wall street’ big-wigs against the ‘main street’ little guys.

    I’m looking at you, Lizzie Warren. (among others)

  11. Wall Street launders the Federal Debt..period..that is all you need to know on who will be destroyed here. The only way to end this entire destruction of integrity, honesty, and the free market is to close down the Fed and end deficit spending..this my Reason writers is the only thing to focus on as libertarians..not abortion, not immigration..not wokness but the liberation of our economic system. Wall Street is a den of whores going back and forth from DC Political Parties/Govt enriching themselves while allowing politicans to buy votes..that is the dirty but honest truth. Ron Paul was spot on with this yet Reason dissed him time and again. End the Fed…and you end this entire corrupt disgusting anti-liberty situation we have today..

  12. Why can´t anyone see the real problem here? Game Stop has not been able to earn enough money to pay the interest for nearly three years now. It is officially a “zombie company”. The numbers of the undead corporations have been rising, even before Covid. And if the Fed continues the policy of cheap money, the zombies will take over.

  13. No one actually likes Gamestop stock. Everyone knows its going down sooner or later, since video games are now almost entirely sold digitally.

    What people didn’t like is that hedge funds could benefit from it by shorting it to a ridiculous level.

Please to post comments

Comments are closed.