How Reddit made AMC and GameStop’s shares go crazy: an ‘insane”Ponzi’ scheme

Many of today’s adults spent their youth in GameStop stores. They bought and sold consoles and games there. They lined up for the releases as well. Now, some of these players have become rich buying company stock and encouraging your friends on Reddit to buy also. GameStop’s stock has skyrocketed more than expected in recent weeks, all because activity among social media investors has started to push it up. Wall Street had bet strongly that the company would go bankrupt, but as the price continued to rise, investors were forced to restart their bets. This caused the stock to rise quickly and then swing wildly.

Jaime Rogozinski, the apparent founder of the Reddit community at the center of it all, told The Wall Street Journal that it is like “a train crash going on in real time”. Keith Gill, the Reddit community trader who helped start the battle, told the newspaper he “did not expect this”.

Last week, just on Thursday, GameStop’s shares reached a high of $ 492.02 per share, only to drop more than half a minute later. The session closed at $ 325 the next day.

GameStop itself hasn’t fundamentally changed in the past month. it is still a struggling retailer facing an uncertain future against the rising tide of online shopping. But its shares have soared by 1,800% – this is not a typo – since the beginning of the year. This dynamic has led Wall Street investors who bet against the company’s future to lose billions of dollars, and the excitement is taking the hype even further.

In the past few weeks, the financial world has watched in shock as GameStop’s stock (or “stonk” as the reddit community calls it) has risen to unthinkable levels. Even Elon Musk tweeted about it, pointing to his 43 million followers a link from the Reddit community that invests in GameStop, called r / WallStreetBets.

At the close of the regular trading session on Wednesday, January 27, the stock was $ 347.51 per share, above the historic lows of around $ 3.30 per share in the summer of 2019. And after the trading session, it fell further 37%, only to rise again. The next day saw even more dramatic moves, with the stock rising to $ 492.02 before dropping nearly 60% to close at $ 197.44. Then, in the after-hours market, it went up again to $ 311.99.

Meanwhile, the stock market trading apps stop or impose restrictions on the purchase of GameStop shares for at least part of the day.

The popular stock trading app Robinhood drew special attention to what seemed to be one of the most restrictive new rules. People had been raising concerns about Robinhood for a while, saying that he “made stock trading” potentially dangerous. Now it is being accused of total market manipulation, including through at least one class action already filed. Robinhood, meanwhile, said last week that market rules have effectively forced it to put those restrictions in place.

Read More: Increase in GameStop shares driven by slang from Reddit’s r / WallStreetBets community. Here’s what it means

“We are seeing a phenomenon that I have never seen,” said Jim Cramer, CNBC’s Wall Street commentator and former hedge fund manager, during a segment when stocks began to swing. And GameStop may be just the beginning. “It’s insane.”

This may seem like a strange story about Wall Street investors being invaded by enthusiastic users of social networks. For some, it has been fun to see these investors being taken to the laundry by a lot of people posting rocket emojis, saying that GameStop’s stock will “go to the moon”.

But for some on Wall Street, it is the latest sign of how social media can change everyday life. Twitter changed the world of news and politics. YouTube and Instagram have transformed the fashion, beauty and entertainment industries. Reddit is now facing Wall Street.

These worlds also overlapped. Fans of Korean pop groups, known as K-pop stans, post numerous tweets about their favorite stars to crush racist hashtags on Twitter. And the TikTokers have come together in an attempt to confuse President Donald Trump’s re-election campaign.

Now, encouraged Reddit communities are talking about taking on other companies that Wall Street is betting heavily on. The Reddit crowd is already trying to boost BlackBerry, the once-popular handset maker that now focuses mainly on selling business software. And Redditors are also targeting the tough AMC movie network, pushing their shares from about $ 2 to more than $ 8 in the night market. On Wednesday, January 27, it closed at $ 19.90 a share, before dropping to $ 12.75. The next day, it dropped further to $ 8.63 per share.

The actions of the Reddit community had such an impact that TD Ameritrade took an extraordinary step last week to stock trading limit on Game Stop and AMC shares, “due to the abundance of caution amid unprecedented market conditions”. Nasdaq also warned that it will stop trading in shares it believes are being manipulated by social media.

Meanwhile, traffic to the Reddit community at the center of the drama, r / WallStreetBets, is breaking records. Mashable reported that r / WallStreetBets accounted for 73 million page views in its discussion forums on Tuesday, January 26, when stocks started to fall. In a seven-day period, it reached about 700 million page views. Reddit is already the 46th most popular website on the web, reaching more than 78 million unique visitors in December, according to comScore. And on Wednesday, January 27, Reddit’s mobile app recorded its biggest single download day, said industry watcher Apptopia.

The entire drama even caught the attention of Saturday Night Live, which satirized Reddit investors as the last sign that Wall Street is not working.

But when the memes stop and the excitement wears off, GameStop will return to being that video game retailer at a time when games are increasingly moving towards streaming and the idea of ​​entering a physical store is still a prospect stressful during a pandemic. At that point, stock analysts say, whoever has held the stock will see its value evaporate.

“This is not natural, insane and dangerous,” Michael Burry, a prominent GameStop investor and one of the themes of the book and the film The Big Short, wrote in a now deleted tweet. Its investment of around $ 17 million in the company skyrocketed to at least $ 250 million last week, with some fluctuations in share prices, Markets Insider reported.

Who listens?

Michael Pachter, a longtime video game industry analyst at Wedbush Securities, said he had not even bothered to update his share price expectations for GameStop since the shares started going crazy. “Who’s listening?” he said in an interview last week. “Nobody cares what a sales analyst says now.”

For him, there are reasonable explanations why people can get a little excited about GameStop. One of his newest board members, Ryan Cohen, helped turn Chewy into one of the largest online pet product sellers in the world, before selling him to PetSmart. GameStop is also on track to be profitable again.

But that doesn’t come close to explaining GameStop’s stock price now. “It’s a Ponzi scheme,” said Pachter, referring to a form of fraud that appears to generate money, but is in fact only sustained by financing new investors. “There is a point where it will fall.”

He suspects that this could happen after the company released its quarterly results in March, when board executives and investors could sell their shares.

One thing analysts looking at ask themselves is whether Reddit investors will lose their millions whenever stocks return to normal. Rogozinski, the man who helped found the Reddit community, said his approach to investing was more like a game than traditional analysis and strategy. Its members, which the community identifies as “degenerates”, often encourage each other to put all of their funds into one action, increasing and decreasing. Your posts are punctuated with phrases like “hold the line” and “diamond hands” (hold your stock for a long time) and YOLO (you only live once).

He told WSJ that he never imagined that the Reddit community would change from the beginning to what it has become. “It’s a bit like watching one of those horror movies where you can see the bandit slowly going up the stairs,” said Rogozinski.

In fact, even Keith Gill, the community member who helped kick-start the GameStop battle, told the Journal that he was surprised at what it turned out to be.

“I thought this negotiation would be successful,” he said, “but I never expected what happened last week.”

Meanwhile, the social media hype continues on Reddit, where users are declaring their intention to buy and hold more GameStop shares, all to send even higher prices.

“My mom told me it’s time to sell,” wrote a Reddit user in a post about GameStop’s stock moves. “Should I find a new mom?”

“Yes,” replied another user. “The answer is yes.”

Read More: Why GameStop, the shares of BlackBerry suddenly rose, thanks to Reddit