The Gamestop and hedge funds sagaFebruary 5, 2021
The grand story of the start of the 2021
We understand here at Pyrin that you are most interested in cryptocurrency news but this story has a lot of good information that can be used in cryptocurrency when it comes to trading and understanding finance.
So how did this all start? This all began when a Reddit user by the name of DeepFuckingValue made some posts on the popular financial subreddit wallstreetbets. One of these posts consisted of a screenshot of his 50,000 USD long positions in GameStop, and he continued to post to drum up interest in this stock.
What happened was that a group of hedge funds purchased around 120% of the stock in short sells, a short sell is when you borrow a stock and then sell it immediately, hoping that the price will go down so that you can then buy the stock at a cheaper price later and pocket the difference between what you borrowed it for and what you bought it for. When more than what’s available in a stock is in a short sell then you have what is called a short squeeze. If the price goes up, there is not enough stock being sold to buy back. So then, if no one sells, the price goes up and up and up, looking for someone to sell to the people who shorted it, since people have to buy it back to give it back to the people they borrowed it from in the first place. Shorts are very risky as when you do one there is unlimited risk if the price goes up and you don’t or can’t buy back in.
Because of this, the price of GameStop stock went from around 5$ to a high of above 400$. This caused a lot of hedge funds to take massive losses. The real amount lost has not been reported by any direct entity but a source familiar with the matter on CNN business reports Melvin Capital lost 53%. This is a large amount to lose because of a bad bet on a stock that is pretty much worthless. As we are slowly seeing now it is going back to its worthless price as people slowly lose the dream of making it rich quick and end up selling their holdings.
Why is this important?
There are a number of different factors to consider when investing, especially when it comes to options trades, and these stories only emphasize the risk that you may not account for in investing. If we bring this back to cryptocurrency, the cryptocurrency markets are so volatile that it makes it really risky to put any kind of option trade. Every few months we hear about millions being liquidated for bitcoin when celebrities bring attention to it. coinmarketcap.com: 57 million in bitcoin shorts liquidated in 10 minutes on Binance thanks to Elon Musk. The risk of group movement and herd mentality needs to be associated with your investing if you are doing any kind of special type of trades.
The more manipulative form of this market movement is called a pump and dump. This is a financial scam where a group of people slowly buy an asset and then once they are done increase interest in the stock and sell it off to all the people they just pulled in. These strategies can be found in movies like The Wolf of Wallstreet. In the crypto community, you will find plenty of groups that call themselves pump and dump groups which will go around finding users who want to make quick money and tell them what assets they are pumping last minute and then sell on all of them. These pump and dumps are another major risk when investing in cryptocurrency option trading.
The one thing we do have in crypto markets, at least right now, is that it isn’t as centralized. When the GameStop event happened there were a lot of companies, RobbinHood being the main one talked about, which stopped allowing the buying of these assets and only allowed users to sell them. While there may be some good reasons behind the scenes a lot of people are taking this to mean that RobbinHood and these companies are purposely helping their hedge fund friends get out of a tight situation. The markets in crypto are a lot more open and you are able to see manipulation a little easier rather than taking the words of some people who may or may not have financial incentives to say one thing or another.
Even though in a lot of ways crypto and standard financial markets are different, there are a lot of things you can learn about from each of them. Even though this may not be a crypto-specific story it is important if you want to be a successful investor or trader.