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How R/WallStreetBets and Reddit Broke the Internet

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Brandon Shamy / ONE37pm

Elon Musk. Meme stocks. Flows before pros. College kids out-trading hedge funds. Who is r/wallstreetbets? Why are people using GameStop and popular in the same sentence?

It’s time to make some sense of this r/wallstreetbets hysteria.

A tale of teen traders

Here’s the back story.

Investing apps like Robinhood gained serious popularity among the youth in 2020. WE WERE BORED. Now, any iPhone with a few hundred bucks can access capital markets with the press of a button.

In comes r/wallstreetbets - the hero-we-never-asked-for Reddit forum that’s doing finance and having damn fun doing it.

Throw together the pandemic, an idle workforce, civil unrest, unprecedented mass communication and democratized access to fintech….and what did you expect? Tech-induced populism has hit the markets, baby.

The result? Market manipulation (nothing new to see here), gamified stocks, social media bans, armies of amateur traders, and spooked-out institutional investors with billions of dollars in the toilet.

Re-defining capital markets

Traditionally, capital markets were set out to achieve one goal: A more efficient means of allocating capital.

A traditional investor buys a stock because it is perceived to be cheap, relative to its potential profitability or valuation.

When you throw in a mob of r/wallstreetbets stans, a dead-end company like Gamestop can suddenly break the boys’ club. The problem, you asked?

Well, retail investors (fancy term for plebeians) with a beer can, a laptop and an Econ 215 test later tonight may not treat stocks the same way a typical securities analyst would.

It’s like the 2008 financial crisis in reverse, but the result is inevitably the same—every bubble’s gotta pop.

Here’s how the strategy works

Two words to remember: short squeeze.

You convince a bunch of people to buy stock options (an option is a contract that allows the holder to buy or sell the stock at a predetermined price) from a company identified as ‘short-friendly.’

Short-friendly companies are dying companies that Wall Street whales like to short for quick gains. Shorting a stock is basically betting on it to go down in price. When tons of people start call-buying a trade, it forces the short-sellers to hedge their risk and buy the stock. That pushes the price of the stock up again in a feedback loop.

This strategy has created some pretty comical and cringe-worthy reactions from the financial elite:

How are they pulling this off?

What’s that old saying? Any way the wind blows...

If a large enough mass of humans throws shit at a wall, some of it is bound to stick. A stock price can go up whether or not the fundamentals suggest that the price is reasonable.

If you watched CNBC on a boring Wednesday in 2015, everyone would be talking about the fundamentals: cashflow, balance sheet, intrinsic value. This is how boring people determine a stock’s value. Not us!

No one ever considered retail flows as an indication to follow pitchforks.

Where do we go from here?

This was the question asked by moderators of r/wallstreetbets this week.

Given it’s not some well-run organization, but rather a bunch of finance bros who sparked a national movement, I don’t think anyone can answer that question right now.

Even regulators themselves have yet to catch up with the impact of mass media on trading.

One thing's for sure—whether it’s Brad from Barstool or Kip the Portfolio Manager—someone’s going to lose a lot of money. As the stock goes up and up, each trader is hoping the next guy will be the one holding the bag when shit hits the fan and the price plummets.

Or maybe GameStop will just keep going up forever.

Bottom line: Beneath the hype and fanfare, there are five or six real-human-run companies that are trending but really struggling to stay profitable. Long-term, even an amateur army cannot solve their problems.

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