- March 9, 2021
- Posted by: Trading
- Category: News
The story of GameStop, GME on the NYSE, and its epic rise and fall and potential stagnation fired the imagination of retail traders and the media in January 2021, but this timeless saga has been repeated in many ways throughout the history of speculation and market manipulation. The notion that it is possible to take advantage of new technology to find a way to profit – and manipulate the marketplace will always endure. GameStop was trading above $400 in January 2021 few weeks ago, by mid-February it was close to $50.
The failure of GameStop and its losses came as no surprise however to most experienced market players. While some in the media and politics cried foul regarding retail brokers’ actions, when the brokers said no more positions could be taken in GameStop and a few other speculative stocks being ‘pumped’ and ‘hyped’ by the likes of Reddit wallstreetbets and on other social media. The move was a decision made by the retail brokers like Robinhood, likely to protect their core business and guard against the potential of defaults. The fear of lawsuits was also a factor from a myriad of groups with interests, which may still be seen down the road as angry participants who were caught up in the ‘motivational mantra’ from influencers seek revenge and claim market manipulation.
GameStop January/February 2021
People proved GameStop could be pumped higher via Reddit wallstreetbets, and influenced the price by insisting it was a new type of battle, ‘Us versus Them’. This has been described as the ‘Rage Economy’ in which groups see themselves battling a nemesis with the force of group action. It has become a legitimate and feared tool within the retail trading world, helped with new technologies via social media. However, the so-called rage economy might have also been a victim of a very old fashioned scheme of pump and dump. Certainly some folks made money with GameStop on its way up as they sold near highs, and some folks certainly believed in the cause as they took on what they perceived as the ‘black hats’ of the hedge funds who they knew were short selling the GME stock.
Sitting Tight Did Not Work with GameStop
As GameStop began to plummet, people within the social media groups were asking for calm and urging fellow traders within social media circles like wallstreetbets to hold on and not sell their long positions. Unfortunately many could not because as the stock slid in value the retail traders were getting hit with margin calls. Short sellers may have actually made money as the end of the market manipulation via Reddit wallstreetbets ran out of power. Short sellers are traders who sold the stock before buying GME at higher values, believing the stock would than go down, profiting from the expected fall in value of the share value in GameStop.
Why Retail Brokers Delisted GameStop
Having bought GameStop using leverage provided from the likes of Robinhood and other brokers, retail traders were protected while the price was going up, but upon the fall in value traders were certainly called by their brokers and asked to put more money to protect their positions or forced to sell their positions which were losing money. Some retail traders panicked on Reddit wallstreetbets as they accused brokers of forcing their hands. Unfortunately they did not understand that companies like Robinhood and other brokers carried huge risks too. The retail brokerages needed to make sure they had enough money in their ‘general’ accounts which are supervised by equity exchanges and the SEC to make sure they had enough money to cover the potential for losses that could happen. Exchanges and the SEC are keen to make sure market manipulations are not possible and monitor stocks like GME which suddenly demonstrated huge volatility.
Basically, Robinhood had to raise massive amounts of money from their own ‘investors’ to protect against the potential damages. Robinhood feared they would be found holding millions of shares of GameStop which suddenly had no value, but had been bought at much higher prices using the leverage of their clients. Meaning Robinhood had to protect against potential default. Because in the end, the money won and lost is real via retail brokers in the US and need to be covered with real cash transactions. While many pointed the finger at Reddit wallstreetbets, other social media like Twitter were factors too in the rush to buy GameStop and its whipsaw trading.
GameStop will not be the last time massive speculation and hyperbole will hit the global marketplace. One unnamed trader was said to have mortgaged his parents’ house to capitalize his bet on GameStop, his fate is unknown, but we can speculate that this person eventually lost money like many others. Media pundits who were quick to defend the retail traders’ ability to go up against hedge funds who were shorting the stock suddenly became quiet in large measure when GameStop began to bleed money and fall from its highs nose diving.
It is also likely hedge funds and smarter large investors knew early on there was a manipulation underway via social media like Reddit wallstreetbets and Twitter and rode the coattails of the speculative frenzy understanding the ‘Rage Economy’ was in full force. They were also likely smart enough to sell before GameStop self-destructed. While ‘due diligence’ was used within the Reddit wallstreetbets group, this doesn’t mean that influencers didn’t participate in some type of market manipulation. As to whether the actions of the ‘leaders’ in the group were legal, a court of law may have to make that decision. What may be held against the Reddit wallstreetbets group in the future is the fact the Reddit subgroup was taken private for unexplained reasons momentarily, until it reemerged as a public group soon after. Were people trying to hide something in the Reddit wallstreetbets group?
Wall Street and Commodities: A Long History of Betting
Tales of legendary traders like Jessie Livermore who was a trader over 100 years ago and took advantage of the new ticker tape reading machines connected to the stock markets and used the tech to achieve profits against financial houses that were slow to change their quotes is a story known by experienced historians of the marketplace. The book Reminiscences of a Stock Operator is a good read.
Speculative frenzies have occurred in the past and will again; currently cryptocurrency mania is taking place again and is being hyped by celebrities wanting to look clever. Elon Musk has also influenced the cryptocurrency market recently with comments regarding Dogecoin, and Tesla coming out and saying they have made a large purchase of Bitcoin. Meanwhile Reddit wallstreetbets continues to run and create waves of speculative trading via the hype from its message board.
Silver saw a major wave of speculation in January 2021, shooting past $30 an ounce and media coverage claimed it was the newest coordinated attack from retail traders via groups like Reddit wallstreetbets, but silver abruptly lost value and was quickly back at $27 an ounce. What happened? Once again retail traders found out the trading game can prove dangerous and costly. Perhaps Elon Musk had a pang of conscience when he talked down Dogecoin on 15th February 2021 by heavily hinting it was time to sell it.
Some claimed silver should go sky high and was undervalued. However, more silver can simply be mined in places like Nevada or Mexico and a host of other places as long term traders in the commodity know. And exchanges can change margin requirements and make investors and speculators put in a large amount of money to back their wagers on commodities. Eventually silver fell when the market couldn’t support its price. Market forces again proved strong as sellers probably wagered silver would run out of steam. Silver remains a legitimate speculative commodity with value, but traders need to consider its potential carefully.
Silver January/February 2021
The Cryptocurrency Express Higher is Speculative
By mid-February 2021, GameStop was trading near $50 and looking likely to find itself a bottom dweller again and idle on the NYSE left alone and unwanted. Silver, which caught the attention of many because of a believed parade of influencers and their legions also faltered; speculators then turned their attention to the cryptocurrency sector as Bitcoin, Ethereum and Dogecoin ran higher on speculative rocket fuel.
At the time of writing, Tether was being investigated in New York for a lack of transparency for potential accounting irregularities via iFinex. The corporation has been asked to provide the New York Attorney General office a barrage of information. Tether is run by iFinex Inc. which also runs Bitfinex. If New York unleashes a formal charge against iFinex it will set off alarm bells in the cryptocurrency world and potentially shake confidence.
Confidence is important in the cryptocurrency sector. In the past few months, the digital currency market has achieved a total valuation of over one trillion USD because of the rises in value in Bitcoin, Ethereum and Dogecoin to name just a few. The decision to pursue legal charges against iFinex might be decided at the end of February according to reports.
Once viewed as a side show and not worth the bother by US regulators, a suddenly vibrant trillion US dollar market must be given attention. The ability of New York State to launch an investigation into iFinex and its cryptocurrency, Tether, will prove interesting. If governments start to turn a sterner eye on Bitcoin some ‘organizations may grow nervous. Tesla’s one billion USD of investments into Bitcoin may be put to the challenge soon regarding potential value.
Considered by many outsiders as only a playground for speculators as a trading vehicle, or criminals as a means for money laundering, Bitcoin and other cryptocurrencies are now gaining favor among mainstream corporations which are viewing them seriously as an alternative payment system. As Bitcoin approaches the $50,000 BTC/USD juncture it will gain even more attention.
Bitcoin January/February 2021
US regulators and other governments, including intelligence agencies are paying more attention because nations like Iran, North Korea and Venezuela are suspected to be active in cryptocurrencies as they offset global sanctions by avoiding transactions in USD. Also, China and Russia are suspected as being active and using cryptocurrencies as a potential way to stay clear of the USD in trading as they try to break free of the stranglehold by the USD in global commerce.
Traders should always ask, am I being manipulated and is someone trying to make me trade one way so I help them profit instead of myself? Elon Musk was asked about Dogecoin recently and the video appeared on TMZ. Who was asking the question and why were they so intent on speaking about Dogecoin and then sharing the video? Certainly a video of Elon Musk is interesting to many people as he shares his thoughts, but not only was Musk happy to answer the question from the ‘reporter’, but his comments helped boost Dogecoin with a surge in value over the next two days of trading. It is also probable that social media group’s like Reddit wallstreetbets view Elon Musk positively because of his tendency to be rather anti-establishment as he goes up against the likes of General Motors, Mercedes and other giants in the auto industry via Tesla.
Musk did nothing wrong, he even warned people that Dogecoin was speculative and someone’s life savings should not be put into the asset. However, only a few days later it became known that Tesla invested a huge sum of money into Bitcoin. Markets thrive on optimistic sentiment and confidence, if this happens via market manipulation many people do not pay attention until costly losses start to emerge from speculative positions.
Speculators who not only pay attention to technical charts, but follow the news and try to grasp sentiment can also use the ‘supermarket trick’. When you are standing in line at a store to make a purchase, people tend to start having conversations. When these people suddenly start talking about assets like GameStop, Silver or Bitcoin and are not considered experts it may be time to acknowledge a phase of irrational exuberance is being reached in an asset.
Traders need to be able to judge potential value when they are pursuing trades by also trying to take the temperature of behavioral sentiment. Quantified value has become almost a dead-end nowadays. Equity indices globally are trading near record highs as governments struggle to stimulate their economies during coronavirus. Groups like Reddit wallstreetbets some may suggest are merely trying to take advantage of a system which has been perceived to favor stronger investment entities like hedge funds before, social media and the ability for retail brokers to act as one is justifiable and a powerful way to trade in unison.
The likes of Warren Buffet who seeks quantified value remain tangible. However, when participating in day trades which are affected by what some are calling the ‘Rage Economy’, retail traders need to try to ask themselves if the sentiment of the crowd is strong enough to effect the asset and for how long. Influencers like Elon Musk can move the market, but Musk can also withstand a large hit to his wallet regarding a speculative trade, many retail traders cannot.
Twitter and Reddit offer two good perspectives into social media banter. While these companies do not want to be blamed for people following ‘influencers’ into speculative assets and certainly do not want to be held accountable for market manipulation, there is no denying it helps their bottom lines as businesses because the amount of their users increase. In fact Reddit ran an advertisement during Super Bowl 55 recently which mentioned the wallstreetbets group as a reason to pay attention to its website. Tom Brady won a seventh Super Bowl and got plenty of publicity, but the ability of Reddit to run a 5 second advert also got the attention of the business world and television viewers.
GameStop, silver and Bitcoin all have different dynamics regarding their measures of value. There are competitors in the world of trading who may try to tell you they have your best interests in mind, but you need to ask yourself if what you are reading and hearing is worthwhile. Speculating has always carried risks, the allure of profit is strong, and judging risks as the power of social media and the rage economy grows has become an important part of trading perspective.
Is WallStreetBets illegal?
The subreddit WallStreetBets is not inherently illegal in any way.
What does FD stand for in WallStreetBets?
FD is WalStreetBets slang for an out of the money option expiring in less than one week.
Why did WSB go private?
WSB was briefly made private by its admins as they said they were simply unable to moderate the enormous volume of digital comments made there after the subreddit made headline news due to the GameStop saga.