Explanation of the crazy world of stones

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You may have seen diamond hands, rockets and r / wallstreetbets screaming in recent weeks – but what does it all mean? In this chart, we explain the events that led to an explosive rise in GameStop’s stock price, along with the Reddit revolution that fueled it.

Gamestop’s shares were on a wild roller coaster, growing approximately 640% from the beginning of last week to the peak. After Robinhood and other brokers initiated trading restrictions due to intensified market activity, shares have since dropped by more than 80% to $ 90 per share.

But the volatile stock price action doesn’t come close to telling the story of how this market frenzy started in the Reddit r / wallstreetbets community, the hedge funds that suffered when GameStop’s stock price soared, and why Robinhood interrupted negotiations last week.

The beginning of the GameStop saga

Although GameStop’s stock price rose more than anyone expected last week, the initial idea behind this rise was shared in September 2019 by u / DeepFuckingValue, a frequent user of the subreddit r / wallstreetbets, a community where ideas trade and investment are shared.

The premise of his business idea was simple: he saw an unrecognized value and much more upside potential compared to the risk of a GameStop downfall.

While people were eager to proclaim the demise of physical game sales, u / DeepFuckingValue noted that the new generation of consoles on the horizon would bring players back to GameStop. Along with the company’s new board and a solid balance sheet, GameStop was not as badly positioned as many thought.

Among those who bet against the company, there were a variety of hedge funds and other players who held a short outstanding position against the stock. Just as legendary investor Michael Burry proposed after him, u / DeepFuckingValue noted the possibility of a small squeeze if GameStop’s stock price went up.

ℹ️ A short squeeze is when the price rises against open short positions to the point where they close their positions by buying back the shares, resulting in a positive feedback loop that continues to push prices up and pressure other sellers.

GameStop Rockets to the Moon

A collection of short positions has accumulated in the games retailer’s stock, with hedge funds like Melvin Capital Management holding short positions for several years, despite GME being at historic low levels. The r / wallstreetbets community saw this great open interest and wanted to “squeeze” them out of their positions.

In August and September 2020, GameStop broke from its lows around $ 4 per share and returned 66% and 53% respectively, reaching new highs of $ 11 per share. Hedge funds accumulated even more as interest rates on publicly traded stocks reached 120%, but GameStop’s upward trend continued, reaching more than $ 20 per share in late December.

Here’s what has happened since:

Meeting	GameStop (GME) share prices	Unrealized Profits from DeepFuckingValue
January 12th	$ 19.95	$ 3.2 million
January 13	$ 31.40	$ 5.8M
January 14	$ 39.91	$ 7.4 million
January 15th	$ 35.50
January 19	$ 39.36	$ 7.3 million
January 20	$ 39.12
January 21th	$ 43.03
January, 22th	$ 65.01	$ 11.2M
January 25th	$ 76.79	$ 13.9M
January 26	$ 147.98	$ 22.8 million
January 27	$ 347.51	$ 47.9M
January 28	$ 193.60	$ 33.2 million
January 29	$ 325.00	$ 46.0 million
February 1	$ 225.00	$ 35.8 million
February 2 nd	$ 90.21

Sources: TradingView, / u / DeepFuckingValue’s Reddit posts

As GameStop’s price reached three digits at the end of January, Melvin Capital was forced to close its short position despite a $ 2.75 billion investment from Citadel and Point72. At the same time, in just a few weeks, the number of r / wallstreetbets subscribers jumped from 1.8 million to 8.3 million.

Robinhood interrupts the negotiation and the position limits of the institutes

On January 28, when GameStop’s stock rose above $ 460, Robinhood and other brokers suspended GameStop’s stock and option purchases, along with the ability to buy fractional bond shares. The broker received a $ 3 billion NSCC (National Securities Clearing Corporation) account, reflecting the high volatility and value at risk on the platform.

In an informal interview with Elon Musk at the Clubhouse, Robinhood CEO Vlad Tenev said that interrupting purchases and instituting position limits allowed the cost of the account to drop to $ 700 million. Prior to this interview, the company posted a blog post about what happened to them, along with an explainer of how negotiations are settled at clearing houses.

Although the position limits that limited the number of shares and options that users could buy were originally placed in 51 different securities, today only five have position limits. This includes r / wallstreetbets favorites like GameStop (GME), AMC Entertainment (AMC) and Nokia (NOK).

Robinhood’s new position limits

Symbol	Actions	Option contracts
AMC	1,250	1,250
EXPR	3,000	3,000
GME	100	100
NAKD	12,000	N / D
NOK	2,000	2,000

You can see the latest position limits on the Robinhood platform here.

Along with these position limits, Robinhood has instituted other limitations related to standard day traders. This limits users with less than $ 25,000 in their accounts to less than four trades in five business days.

r / wallstreetbets Discover Dogecoin and Eyes Silver Shorts

As the purchase of many of the preferred shares on r / wallstreetbets was halted, the community turned its attention to the cryptocurrency Dogecoin. Before the 28th, Dogecoin was trading for $ 0.007 a currency, but in less than 24 hours the currency rose 1,000% to a high of $ 0.086.

After that, meme-based cryptocurrency stabilized at around $ 0.033, which is still almost a 350% return for those who bought before the 28th.

Since its foray into cryptocurrency, some r / wallstreetbets users have identified silver as a new opportunity with short-term potential. Since the 28th, silver has increased by about 5%. The increase in volumes for several silver brokers caused delays or resulted in the suspension of silver purchases over the weekend.

Despite the rally and the growing excitement surrounding the precious metal, there are those in the r / wallstreetbets community who consider this a distraction. Malicious players with a short interest in the GameStop may be trying to distract from the GameStop’s short grip.

What’s next for Robinhood er / wallstreetbets?

Since these unprecedented market events, Robinhood has raised $ 3.4 billion in an investment round to further support his goal of “expanding the investment capacity of daily investors”. However, the company faces dozens of lawsuits for suspending stock purchases on January 28 and will likely have to put its IPO in the background.

The decision to stop buying ended up removing large amounts of buying pressure from GameStop and other titles, and its newly instituted position limits and the standard day trader rule pushed many users off the platform.

With his actions, Robinhood unwittingly stimulated a deep division between Main Street and Wall Street. Many members of r / wallstreetbets now feel that their trades and investments are of idealistic importance that is worth more than potential profits or losses.

Although there is still much of this story to play, last week there was an irreversible change in how many individual investors perceive the market, its participants and its rules. Although new rules and regulations change shape going forward, one thing is certain: the increase in information sharing has changed the way financial markets will be traded forever.