This Will Change the Financial World #86
The events that have unfolded around $GME, $AMC, Robinhood and WallStreetBets will change the world.
In today’s education letter, we explore how WallStreet Bets was able to cause a 700% rally in GameStop’s stock price.
Next, we uncover the implications for other communities, such as our very own cryptocurrency investing and trading community.
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Grayscale Prepares for DeFi with New Filings ✅
The largest Bitcoin (BTC) and cryptocurrency asset manager in the world, Grayscale, could be set to move into the decentralized finance space after documents for several new trusts were filed in the Delaware corporate registry. New trust filings for Aave (AAVE), Polkadot (DOT) and Cosmos (ATOM) were filed on Wednesday. On the same day, Grayscale also registered trusts for Cardano (ADA), as well as the privacy coin Monero (XMR). Read more.
Coinbase Officially Announces Bid to Become Public Company 🌎
Coinbase has made official its plan to go public by way of a direct listing, according to a blog post released Thursday by the U.S.-based crypto exchange. "Coinbase Global, Inc. today announced its intent to become a publicly-traded company pursuant to a proposed direct listing of its Class A common stock. Such proposed listing is expected to be pursuant to a registration statement on Form S-1 with the Securities and Exchange Commission (the “SEC”)," Read more.
Ray Dalio Calls Bitcoin ‘One Hell of an Invention,’ 💲
Bridgewater Associates founder Ray Dalio said Bitcoin is “one hell of an invention” and he’s considering cryptocurrencies as investments for new funds offering clients protection against the debasement of fiat money. “To have invented a new type of money via a system that is programmed into a computer and that has worked for around 10 years and is rapidly gaining popularity as both a type of money and a storehold of wealth is an amazing accomplishment,” Dalio wrote in a note to clients and later posted on Bridgewater’s website. Read more.
Reddit Joins With Ethereum Foundation To Build Scaling Tools 📌
Reddit is growing its role in the Ethereum ecosystem, with the goal of building out scaling tools for the blockchain network. The social media platform announced Wednesday it was expanding its work with the Ethereum Foundation to provide development resources to scaling tools. In the announcement, posted to the Ethereum subreddit, Reddit employee u/jarins said the move increases its commitment to the technology, and echoes its long-held “decentralized ethos.” Read more.
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This Will Change the Financial World
The Internet vs Wall Street
“Reddit Investors Shake Up Wall Street.”
“Gamestop Stock Price Surges 700%.”
“Gamestop Mania Reveals Power Shift on Wall Street.”
It seems that overnight news headlines just like these have flooded everybody’s Facebook feeds, TikTok hashtags, and google search results.
Before I explain what happened with GameStop, I want to share a few comments others in the financial space have made to demonstrate the magnitude of what has unfolded over the past two weeks.
Jim Cramer, investor and CNBC personality, called this the “squeeze of a lifetime.”
Matt Levine who writes opinion columns for Bloomberg described the actions of the Reddit community as “utter nihilism.”
The impact was so large that it was one of the questions put directly to Jerome Powell, Chair of the Federal Reserve, at the FOMC meeting last night.
Even someone from Wallstreetsbets Reddit itself (the thread that started this whole thing) described GameStop’s price action in a blunt and facetious fashion: “it was a meme stock that really blew up.”
No matter how you recount the series of events that have unfolded, it’s likely that the uproar and disbelief we are experiencing is only the start.
So What Happened?
GameStop is a video game retailer that operates in more than 5,000 physical locations. Hedge funds and institutional investors used the shutdown of physical stores like GameStop as a way to justify taking massive short positions in the market.
GameStop was the single most shorted stock in the entire Stock Market and S&P 500 at the time as shown here. Institutions went as far as to publicly humiliate those buying the stock.
For example, Citron wrote on Twitter that buyers were “suckers at this poker game.” In fact, funds became so confident that GameStop would fall that they continued to short the stock aggressively, to the point where the short float was 140% (this means that more shares of GameStock were being shorted than there were shares publicly available for trading).
No way a multi-billion dollar hedge fund is wrong, right? Here’s where things get interesting.
Retail traders on the subreddit forum Wallstreetbets noticed how heavily shorted the stock was and decided to come together as a community and push the price of the stock up.
They hoped to profit off of institutions who would have to cover their positions by buying back the stock at a higher price. This is exactly what happened but at a magnitude that not even the world’s wisest investors could have predicted.
In the two weeks that ensued, the Wallstreetbets community sent the price of GameStop from a low of $20 to a high of $483, wreaking havoc and financial ruin on multi-billion dollar hedge funds and making everyday people very rich in the process.
It was announced at 6:20AM on 27/01 on CNBC that Melvin Capital closed their short position for a HUGE loss. On 26/01, it came to light that Melvin Capital will file bankruptcy. On the other side of the table, one Reddit trader’s P&L statement illustrates how his $53,566.04 became an $11.2 million paper fortune.
On the surface this may seem like your traditional short squeeze (if you’re unsure what shorting a stock or short squeeze means, check out this infographic that explains it in simple terms). In reality, this was, is, and continues to be an unapologetic and heroic symbol for honest, hardworking, and innocent people to revolt against the 1%.
Wasn’t Robinhood Meant To Be A Hero?
The Robinhood app, a broker popular among small investors, halted all buying of any shares in eight companies including GameStop. What does that mean?
Let me help you interpret what Robinhood is saying:
Massive, billion dollar corporations are losing a lot of money and we know they made a poor investment decision by shorting GameStock but we need to make sure they’re okay, so we’re not going to let you sell your position for profit. You have to wait until we, the folks at Robinhood, feel that things are fair again.
This news has sent the Internet into uproar. Republican Ted Cruz agreed with Democratic AOC who wrote, “As a member of the Financial Services Cmte, I’d support a hearing if necessary.” Dave Portnoy (President of Barstool Sports and informal member of the Crypto Twitter community) writes, “Dems and Republicans haven’t agreed on 1 issue till this. That’s how blatant, illegal, unfathomable today’s events are.”
Alexandria Ocasio-Cortez @AOCThis is unacceptable. We now need to know more about @RobinhoodApp’s decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit. As a member of the Financial Services Cmte, I’d support a hearing if necessary. https://t.co/4Qyrolgzyt
When Wall Street is wrong, Wall Street changes the rules. But amidst the disbelief, this has revealed cracks in our world’s financial foundation that will be hard to forget.
French Revolution of Finance
So what can we infer about future events from these most recent happenings? The last thing we want to do is to miss out on another positive Black Swan event.
SkyBridge Capital’s Anthony Scaramucci said in an interview with Bloomberg that the GameStop saga is positive for Bitcoin. Positive due to style, rather than their substance. He believes the events are:
“Proof of concept that bitcoin is going to work,” and should be taken “seriously”
Regular readers of the Market Meditations will know never to take anything at face value. So let’s understand Scaramucci’s thought process and reasoning, to judge whether it can attest to his claim.
His thesis rests on the idea that the power of the GameStop rally exemplifies the extent of financial decentralisation. This is the central idea behind Bitcoin. Bitcoin is underpinned by a digital ledger distributed across computer networks rather than a central authority.
Increasingly, smartphones and low cost trading are “democratizing” the formerly insular and highly concentrated business of money management.
“How are you going to beat the decentralised crowd? That to me is more an affirmation about decentralised finance.”
Retail investors are able to make an impact on a scale we have never seen before. We have witnessed the power of individual investors over traditional institutions.
The traditional Wall Street view is that markets are driven by some kind of fundamental value. What we have seen these last few days is a growth in speculative retailers who don’t hold a view on GameStock’s valuation.
As Bloomberg’s Tracy Alloway says, “flows before pros”. In other words, an age where the markets are driven by flow of capital rather than fundamentals.
There is of course some argument of the fundamentals of the company. For instance, there is a fundamental bull case for GameStop on Reddit that argues the company should be worth about $700 per share.
Whilst there might be some truth to the argument that there are fundamentals underpinning the rally, you can think of it as a drop in the ocean with regards to the extent it helped cause the price action we witnessed.
Scaramucci went on to say:
“It’s the age of the micro investor and you better take it seriously, otherwise you’ll get taken to the cleaners.”
If you find this argument convincing, it can be perceived as a bullish bitcoin and crypto. It can also be regarded as a confirmation of the diluted significance of fundamentals in the market and the increased relevance of capital flows. Dogecoin has been the next most recent beneficiary.
The coin has rallied significantly, off the back of a thread called r/SatoshiStreetBets, which called for the currency to hit a value of $1 per coin. Dogecoin also received another boost after it was tweeted by an account called WSB Chairman, which insists it is not associated with the Reddit group WallStreetBets.
To wrap it all up, these recent events have changed the shape and the perception of the markets entirely. We have seen the extent of power the individual trader and investor holds and the extent to which institutions will go to curb that power. This may well be the French Revolution of Finance.
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Disclaimer: The content in this newsletter is for informational purposes only. Nothing in this email is intended to serve as financial advice. I am not a financial advisor. Every investment and trading move involves risk. Do your own research when making a decision.