What is the GameStop stock controversy?

(WILX) - Even non-gamers may be interested in following the recent controversy surrounding the video game retailer GameStop, billionaire Elon Musk, and a group of users on the website Reddit. The effects of the growing conflict are already reaching beyond the video game industry, and may even result in more regulation on the stock market.

Background

Many people still think of video games as a hobby exclusively for children, but the reality is that 164 million adult Americans are now gamers. That’s 164 million adults purchasing systems, purchasing games, buying extra downloadable content, reading reviews, watching tutorials, and so on.

For perspective, the video game industry has grown so much that it now generates more money than the North American sports industry and the global movie industry. Combined.

More than possibly any other business, advancements in technology change what gaming looks like. In the 80′s most gaming was done in arcades. By the 2000′s, home consoles were cheap enough that most gaming was done in the living room, with customers switching out disks to change what game they would play. Another two decades later and it’s rare to see a video game disk, with most computers and consoles downloading video games directly from a seller.

So, when a once-popular brick-and-mortar video game retailer was on the ropes financially, following a year of trying to compete against online retailers by selling an electronic product during a pandemic, it was big news that a group of Redditors made it the fastest growing stock on the market.

The world’s first meme stock

GameStop had recently made some highly praised structural moves. Imagine how Blockbuster would have acted if its leaders had a few years further foresight with the home video market, and that’s more or less what GameStop did. Investments were made to adjust to a growing preference of online sales, stores that were not able to turn a profit were closed.

To Wall Street traders, though, the math still made it clear that the smart bets were on failure. Not enough new was offered, not enough of what used to work for the GameStop business model was relevant, competition like Amazon was already going strong, there was the overhead involved in having employees physically in stores and, of course, a once-in-a-century pandemic.

Smart bets were on shorting the stock, which is what many Wall Street traders did.

Shorting a stock is essentially betting on that stock losing value. If the stock becomes less valuable then the person who shorts it makes money. If that stock becomes more valuable, the person who shorted it loses their initial investment and must pay out the money that stock makes over it’s initial value. Meaning if you short a stock that is worth $10 and it goes up in value to $15, you would owe $5. If you held on to that stock and it continued to grow in value to $45, you would owe $35, and so on.

There is a limit to how long you can hold on to a stock you’ve shorted, so if the stock is at a very high value when time runs out you could find yourself owing a large sum of money.

Enter Reddit.

For those that aren’t aware, Reddit is a collection of internet forums on just about every topic imaginable. There users share stories, memes, jokes, advice and generally are there to enjoy the company of like minded individuals. One forum of Reddit-- which has over 2 million users-- is called r/WallStreetBets, which is focused on the topic of trading stocks.

When r/WallStreetBets began discussing the state of GameStop stock, an idea to intentionally go against the grain became increasingly popular. The basis of the idea is that if lots of people bought GameStop stock as though it is valuable, the actual value would increase, thus performing the modern equivalent of turning lead into gold.

It would come at the expense of those who chose to short the stock of course, but stock traders who were benefiting off the downfall of a company that made up a large part of some people’s childhood were not seen as sympathetic figures. r/WallStreetBets got to work.

A modern Philosopher’s Stone

The sudden mass buy of GameStop stock by so many traders resulted in the price of the stock soaring. For context it was valued at $3.95 in April of last year, and on Wednesday was valued at $342.87.

In part that jump was due to Tesla CEO Elon Musk joining in with a tweet.

Those that got in early really did accomplish what the fabled Philosopher’s Stone was supposed to: Changing lead into gold. There are users of r/WallStreetBets that claim to have made $300,000 off of the play, and still more that are insisting everyone hold on to the stock as it continues to increase in value.

The entire operation doubles as a trust exercise. A selloff from enough users would shake the suddenly-massive market for Gamestop stock, which could have an effect like a snowball in reverse: with everyone trying to cash in while the stock’s good and thus devaluing back to where it started.

So far, at least, the Redditors are mostly holding on to the stock.

Regulators respond

If the current trend in GameStop stock continues the investors who initially shorted that stock will owe a truly massive amount of money when they run out of time they can hold on to it. About 71 million GameStop shares are currently shorted. To date, those bets have cost investors about $6.12 billion, including a loss of $2.79 billion on Monday alone.

Market forces are taking notice. Jen Psaki, White House press secretary, found herself fielding questions about the stock during Wednesday’s press briefing.

“Our economic team, including Secretary Yellen and others, are monitoring the situation,” Psaki said when asked about the stock price surge.

The trading of GameStop stock specifically has been limited by some trading apps, including the Robinhood app that was popular for first time traders. At the time of writing, shares of GameStop could not be bought, only sold.

U.S. Congressional Representative Rashida Tlaib, from Michigan’s 13th district, voiced her criticism of Robinhood restricting GameStop share sales.

This could set precedent for how mass communication is allowed to be involved in the trading of stocks. Will mass coordination between individual traders be allowed like what happened in r/WallStreetBets or will the regulators ban such activity?

Copyright 2021 WILX. All rights reserved.