Why the Market May be One Week Away From Crashing

Photo by Samantha Gades on Unsplash

“What the hell is going on?!”

You scream as the stock market shatters around you. Redditors are shaking the foundations of the market while hedge fund managers run screaming from the building, desperately shoving cash into their pockets as they run.

Ladies and gentlemen, what we’re experiencing is something unlike anything we’ve ever seen before.. and the ride isn’t over yet.

The Who

This whole misadventure begins with r/WallStreetBets, the subreddit made up of thousands of investing fanatics who believe in the average investor and hate the crooks that make up Wall Street.

This subreddit has been a big part of Reddit for years, but jumped from the front page of the internet to the front page of the New York Times this week when they pulled off their biggest stunt yet. They rallied together Redditors from all over the world and pulled off a ‘short squeeze’ that crippled a hedge fund, and they’re not done yet.

The Why

This whole adventure was started largely by a Reddit user called DeepFuckingValue who developed a soft spot for GameStop, the video game retailer who’s been bleeding cash for years.

I wrote an article early last year where I predicted GameStop’s very likely demise. Well, apparently, I wasn’t the only one predicting a swift death for the once-great retailer. Several hedge funds including Melvin Capital took out short positions that would have made them a lot of money if and when GameStop failed.

A short position is basically a bet someone (usually a very rich someone)makes predicting the collapse or downturn of a company.
Companies such as Nokia and AMC have also been saddled with millions of dollars of short positions by hedge funds similar to Melvin Capital, although these hedge funds have been rethinking these positions in recent days.

A short position basically allows someone to borrow shares and sell them at the value they’re currently trading at.
This person can keep the money, but eventually needs to return the share they borrowed.

This person is betting that when they eventually buy back and return the share, it will have lost value. This will mean that they’re buying it back at a cheaper price and can keep the difference as profit.

Unfortunately for this person though, if they have to buy back the share at a higher value than what it was when they borrowed it, they stand to lose the difference between the value they sold it for, and the value they’re returning it at.

Why Reddit became so enraged recently is because GameStop finally had a plan to turn around their luck and was seeking investment for growth. Unfortunately, this meant increasing the company’s value and hurting the bottom line of the powerful hedge funds that control Wall Street.

(Remember, if GameStop worked to increase their value, it would hurt anyone with a short position in GameStop).

These powerful hedge funds not only own short positions in GameStop, but own so many positions that at one point, the shorts actually out-valued GameStop itself.
This means that with all their trading and selling, these vampires had actually traded more shorts then there were GameStop shares. This is the same sort of shady practice and unethical behaviour that proceeded the housing crash in 2008.

The only difference between now and 2008 however is that we in 2020 have suffered a virus and were stuck home and bored all year. Because of that, a lot more people have become a lot more interested in investing, and have figured out how stacked against them the market really is.

There are so many options out there for rich hedge fund managers, and so few for average people.

But luckily for us all, these bored everyday people have also become a lot more financially literate and ready to do something about this crappy situation.

DeepFuckingValue and the others at r/WallStreetBets were enraged that this kind of practice is going on legally and unregulated, so they did something about it. They bought up a ton of GameStop shares and forced up the value. The more demand created by this group, the further the share price continues to grow.

Today

It’s now Friday morning January 29th 2021, and the stock price is continuing to soar. The higher the share price climbs, the more the hedge funds lose, and the closer they are to their losses outweighing their liquidity, forcing them into bankruptcy.

The Downside

On one hand, the movement that has been launched over GameStop shares is a very noble and righteous one. Wall Street vampires and hedge fund managers are still engaging in shady practices, because if 2008 taught them anything, it was that financial crime absolutely does pay.

On the other hand, the stock market is teetering and could fall apart any minute.

Because of the enormous imbalance of trading, GameStop share trading is getting to the point where it’s destabilising the entire stock market. Enormous amounts of money are being shifted to one side of the table, and the entire thing is about to flip.

You may have noticed your unrelated US shares probably dipped in value today, and that trend will probably continue over the next week.

You’ll also notice that you might find it difficult buying shares today. My friends and family have been reporting to me that their share purchasing apps have been crashing, and that they’ve been unable to execute trades.

I tried to buy GameStop shares earlier today and was denied. (Luckily after about an hour I tried again and was successful).

People who use Robinhood were straight up banned from buying GameStop shares, which could be seen as a move to protect the unravelling stock market, but could also be seen as a move to protect their parent company which has direct ties to and receives funding from a hedge fund that owns GameStop shorts.

Regardless, telling people they can’t buy something will only ensure that they will be twice as determined to buy it and when they eventually do, they’ll buy twice as much.

Photo by k worthington on Unsplash

What now?

I and a lot of my friends and some of my family have joined in and bought GameStop shares. It’s a really noble cause, and I think it’s one that’s well worth supporting.
I can’t however recommend that anyone else do it, because it’s an incredibly risky trade, and you could easily lose it all.

I personally haven’t invested any more money than I’m willing to lose, which is a good rule of thumb for all investing.

The market will continue to remain unstable until the short positions end in 6 days, after which things may return to normal, or may crash completely.

If those of us supporting this cause continue to hold onto our GameStop positions over the next week and don’t buckle as the price jumps and drops thousands of percentage points, we may cause a lot of billionaires to lose a lot of money very soon.
Once that happens, everyone will probably try to sell off all their shares all at once and may inadvertently tank GameStop mere hours after the shorts predicting their demise have expired.

So in a week, GameStop may actually tank after all this, and the stock market may crash under the weight of everyone trying to sell their shares all at once. So basically, get ready for a tricky month.