The GameStop Short Squeeze: A Deeper Dive into What Happened and How It Will Impact DeFi

If you haven’t heard the news about GameStop by now, you may be living under a rock. But of course, there’s no way you haven’t heard the news. You are after all a progressive investor with a deep and clearly defined interest in cryptocurrency investing.

What’s happening with GameStop, a video game rental company that’s losing money every fiscal quarter (PS, it’s called EB Games in Canada) is educating both retail and institutional investors on the power of community, social media, decentralization and a willingness to pour capital into something you believe in.

Not only does the GameStop short squeeze present a once-in-a-lifetime opportunity for retail investors to stick it to hedge funds (and potentially get rich in the process), it’s also showing society that younger retail investors belong in the investing world too.

GameStop stock is currently cooling off trading around $100 USD at the time of this writing after reaching highs of around $500 last week. That said, the whole short squeeze adventure that started on Reddit and continues to move its way throughout other stocks and sectors is likely to bring a new wave of people to a deeper understanding of cryptocurrencies and decentralized finance.

It’s time to review the wild ride that is a GameStop, gain an understanding of a short squeeze, and learn about how this is all going to spark a new wave of adoption for Bitcoin and DeFi.

The Details of the GameStop Short Squeeze

When a company is failing to improve its bottom line, investors can capitalize on a plummeting stock price by short selling the stock. When you short sell a stock, you’re hoping it will go down. The broker you’re working with takes the stock from another investor and lends it out to you. If the price goes down and you decide to exit your short position, you get to keep the profit from the decrease in price to yourself.

That said, there is a danger in betting on a stock to go down. The danger is that when you bet on a stock to go up, the worst you can do is watch it go to zero meaning you lose 100% of your investment. However, if you bet on a stock to go down to zero from $100 and it goes up to $500, you’re now on the hook for 100% of your losses plus an extra 300% on top of that. You can lose more than you invested if you’re short selling a stock and guess wrong. This is where the concept of a short squeeze comes in.

What Is a Short Squeeze and Why Is It Happening to GameStop?

If you’re short selling a stock with $100, it’s easy to exit your position when things go wrong and you want to save yourself from losing an extra 300%.

That said, things are a little bit different if you’re shorting the stock for $5 billion. With that amount of capital invested, you can’t just exit your position by making a simple market order and cutting your losses. It can take several days or weeks to close out of such a big position. In theory, you should only be able to short sell 100% of a company, but since brokers can lend out shares to investors and other brokers (which is what happened in the case of GameStop and routinely happens in many other stocks), it’s actually possible to lend out way more than 100% of the available shares (because the same shares can be lent out more than once).

When that happens and there are billions of dollars at stake, a rising stock price can crush short-sellers. They can’t get rid of their short position easily. This means there’s only one way to save yourself from billions of dollars in short-term losses while you scramble to exit your short positions. You have to bet against yourself and buy shares.

This is exactly what Redditors figured out. They saw an opportunity to put pressure on billion-dollar hedge funds shorting the stock, knowing that they could force those hedge funds to buy the stock and bet against themselves, which pushes the price up exponentially. That’s how you get the stock of a company that isn’t making much revenue during a pandemic to go from trading around $30 to trading at an all-time high of nearly $500 USD in two months.

 

How Centralized Finance Creates Issues with Regulation and Liquidity

As much fun as it may be for you and I to log on to WallStreetBets and read about all the small-time investors sticking it to the man, the reality is that two hedge funds and one trading app are in hot water as a result of this wild ride. Melvin Capital and Citron Research are the two hedge funds taking it on the chin to the tune of billions of dollars in losses. Robinhood is the popular trading app only available to American investors that is intending to launch an IPO later this year, but is now being questioned by regulators. Why is that?

 

Robinhood Is Limiting Trading on Many Different Securities

Days after the short squeeze saw GameStop shares skyrocket in price, the CEO of Robinhood announced the company is restricting the purchase of various securities named as potential short squeeze opportunities by WallStreetBets. The company initially suspended purchases of GameStop for an entire day, allowing the price of shares to plummet. The dropping price in theory allowed hedge funds to cover their short positions and save money. One of those hedge funds is Citadel, which also happens to be a major investor in Robinhood.

That’s why investors, hedge funds and even the U.S. Securities Exchange Commission have reason to believe there is something shady going on with the company. If history proves anything (see 2008 economic crisis), it’s that governments will almost always be willing to bail out billionaires at the expense of the retail investor. The truth is that even if a class-action lawsuit against RobinHood finds the company guilty of wrongdoing, people like you and I may not see a dime for our troubles.

Don’t fret though. This whole GameStop fiasco is about to present all novice and intermediate retail investors with the opportunity of a lifetime. Censorship resistant participation in finance thanks to decentralization.

The Decentralized Finance Boom Is Coming Faster Than Anticipated

The overwhelming majority of decentralized finance projects available to investors like you and I currently live on the Ethereum blockchain. You can tell just by looking at the fact that the seven-day average of fees collected on the Ethereum network is more than three times higher than the fees collected on the Bitcoin network. Add that to the fact that 13 of the top 20 projects according to transaction volume also live on the Ethereum network and it’s easy to see why the price of Ethereum is popping right now.

What’s more important than all of that however is the fact that crypto enthusiasts and big-time investors now see the value in investing in an asset class that is censorship resistant. Even Elon Musk, the founder of Tesla Motors and newly minted richest person in the world, now has the hashtag #Bitcoin in his Twitter bio.

With everything that’s going on surrounding short squeezing and censorship in the stock market, it’s obvious that there’s no better time than right now to consider moving some of your assets onto a decentralized platform as a means of protecting your wealth, your privacy and your future.

Perhaps that’s part of the reason the market is currently in the middle of altcoin season. Ethereum is not the only project gaining on the price of Bitcoin at the moment. Dogecoin (thanks again to Redditors), PolkaDot, Litecoin, Cardano, Tezos and many others are also experiencing significant increases in value recently.

How You Can Capitalize on GameStop Decentralized Finance

If it wasn’t abundantly clear to you that governments, central banks and major hedge funds rule the world of traditional finance and oftentimes get away with things they shouldn’t, it should be now. While you can certainly join a class-action lawsuit if you’ve been burned in the past, it’s probably also a good idea to start protecting your wealth using blockchain technology. Elon Musk believes in it and so do many other billionaire investors like Chamath Palihapitiya, Stanley Druckenmiller and others.

The best way to start capitalizing on all of this is to start investing in Ethereum tokens in learning about decentralized projects and altcoins. Bitcoin will always be a great store of value, but Ethereum transaction volume proves that investors are always going to be on the lookout for opportunities to gain more control over their wealth and earn the best annual yield rates possible, all without having to answer to governments or billionaires.

Netcoins is the best way for you to join the revolution. We’re a cryptocurrency exchange in Vancouver that respects your privacy and will not limit your ability to turn a profit just because a big-time short seller on the other side of the transaction might have to take a loss. Netcoins believes in a truly free market.

Looking to buy and sell ETH? Netcoins is Canada’s first publicly owned crypto trading platform to be fully regulated. Simply create an account with Netcoins, fund it with an e-Transfer (more funding options available) and head to the trade page to buy ETH. Sign up today!

Register for a free account today and maintain your right to a participate in a free and fair market.