How the GameStop 2021 Episode Should Give Direction to Young Investor Protection – Cryptopolitan

Some stocks attract investors and the general public’s attention like no other but the same enthusiasm is exhibited by young investors to day with cryptocurrencies. A cryptocurrency’s success or failure is followed with awe, its every move is dissected by analysts, investors, and the media. Let’s look at how the stock price of one such company, GameStop, has been the subject of discussion among investors and members of the general public in recent months. What is it about GameStop that has attracted so many investors? Read on and Let’s see the parallelism between stocks and crypto investing and how we can learn a lesson that applies to both investors.

The GameStop Story: How It All Started

The rise and fall of GameStop’s stock price throughout the years is a narrative that can only be understood by learning the company’s history. In 1984, the company now known as GameStop began life as Babbage’s, a store specializing in the sale of computer software. The firm expanded swiftly and through a number of mergers and acquisitions until becoming GameStop in the year 2000.

GameStop has been the go-to destination for video game consoles and accessories for decades, with hundreds of locations throughout the United States and a well-deserved reputation for low pricing and a large range. Although, competition from digital downloads and online shops like Amazon has hurt GameStop’s business model, resulting in falling sales and a falling stock price.

Amid rising pressure from shareholders, GameStop’s stock price reached a new low of little over $3 per share in 2019. With a sizable investment in GameStop, Ryan Cohen, CEO of online pet retailer Chewy, pushed for the firm to adopt e-commerce and digital distribution. In January 2021, Cohen became a member of GameStop’s board of directors, signaling the company’s commitment to adapting to the changing digital landscape.

Similarly, a community of retail investors on the Reddit site r/WallStreetBets saw that hedge funds and other institutional investors were shorting GameStop’s stock. These investors had placed large short bets, betting that the stock’s price would drop and then purchasing back the shares they had sold at a cheaper price. The users of the subreddit r/WallStreetBets saw a short squeeze opportunity in GameStop’s stock and flooded the market with purchase orders, driving up the stock price and forcing the short sellers to cover their holdings at a higher price.

GameStop’s stock price went from roughly $20 at the start of January 2021 to a high of nearly $400 by the end of the month, thus the strategy clearly paid off. Many small investors saw GameStop’s stock as a means to take on Wall Street and make a profit, leading to a surge of interest when the short squeeze generated enormous losses for the short sellers.

The GameStop Short Squeeze: What Happened?

The rise in GameStop’s share price was not entirely due to the whims of the market. The short squeeze, which occurs when investors who have bet against a company are obliged to acquire shares to cover their short holdings, was instead the driving factor. When an investor anticipates that the price of a stock will go down, they may use the method of short selling. In a short sale, an investor borrows stock from a lender and sells it, with the intention of buying the shares back from the lender at a lower price and pocketing the difference.

However, if the stock price goes up instead of down, the investor may be obliged to purchase back the shares at a higher price, resulting in a loss. Covering the short position is what happens when you do this. Several large hedge funds and institutional investors have placed substantial short bets on GameStop shares, anticipating that the stock price would decrease as a result of the company’s deteriorating financial status and shifting business strategy.

The short squeeze occurred when members of the Reddit forum r/WallStreetBets started collectively purchasing shares in GameStop, driving up the stock price and forcing short sellers to quickly cover their bets. It was a self-reinforcing loop, as the rising stock price compelled additional short sellers to cover their bets, sending the price further higher.

Short sellers lost a ton of money on their bets on GameStop stock since its price rose more than 1,700% from its 2020 lows to its high. In the short squeeze, retail investors who had worked together to boost GameStop’s stock price won an unexpected win. Social media’s ability to rally individual investors and take on Wall Street was also highlighted.

Regardless, the short squeeze also ignited a discussion over the ethics of short selling and market manipulation, as well as the role of social media and online communities in the stock market. There were many who said the large increase in GameStop’s stock price was based on nothing more than conjecture and that the company’s shares were thus grossly overpriced. 

Still, others argued that individual investors were merely taking advantage of a market opportunity, whereas short sellers had taken a huge risk by betting against the company. The GameStop issue, regardless of the argument around the short squeeze, has shown how vital it is to comprehend market dynamics and the influence that unexpected occurrences may have on stock prices.

The Contribution of Social Media to GameStop’s Success

The subreddit community known as r/WallStreetBets on Reddit played a pivotal role in the GameStop controversy. The group is made up of amateur investors who talk about their stock choices, exchange investment tips and advice, and share investment information. When it came to GameStop, the investing community took note of the fact that hedge funds and other types of institutional investors were massively shorting the company. As a result, they saw a chance to push up the stock price by purchasing a large number of shares all at once.

The members of the community coordinated their actions by using social media sites such as Twitter and Discord to share information and encourage one another to purchase and hold GameStop shares. They were successful, and as a result, the price of GameStop’s stock started to increase sharply. This created a short squeeze, which resulted in significant financial losses for sellers of short positions.

Because it demonstrates how online communities may organize tiny investors and upset established market dynamics, the role that social media played in the GameStop drama is crucial. It also raises concerns over the morality of manipulating markets and the influence of social media on the financial markets.

The Aftermath of GameStop’s Stock Surge

Although the GameStop story received widespread media coverage, the fallout has been just as important. A wave of legal and regulatory action was taken in response to the sudden increase in stock price, and there was discussion about the morality of short selling and the place of regular investors. The regulatory crackdown on short-selling and market manipulation was a major reaction to the GameStop incident. The Securities and Exchange Commission and the Financial Industry Regulatory Authority have initiated investigations into the GameStop short squeeze to see whether or not any rules or laws were broken.

Several brokerages, including Robinhood, came under fire for how they handled the GameStop rush. Concerned about market volatility and risk management, Robinhood briefly suspended trading in GameStop and other highly shorted companies. Retail investors were outraged by this decision because they perceived it as an effort to shield short sellers from liability and prevent them from benefiting from the stock’s sudden upswing.

Some actions against Robinhood, such as that by Massachusetts, have been based on provision of investment advice and on preventing customer funds from misuse under the SEC’s Customer Protection Rule 15c3‑3. Younger investors have been treated by many politicians as a new source of “dumb money,” drawn in by zero‐​cost trading. 

Social psychology of young investors and the need for protection

As part of its makeover, GameStop has drawn the attention of numerous prominent investors, including Ryan Cohen, creator of Chewy. These financiers are placing their money on the hope that GameStop can reverse its fortunes in light of the shifting video game market. The continuous participation of individual investors is another contributor. Small investors may shake up the market and take on Wall Street, as seen by the GameStop short squeeze. This has sparked a surge of new retail investors anxious to get in on the action in the stock market. But exactly, what’s the lesson to be learned from those left to flounder after a financial debacle?

“Gamification” refers to platforms’ use of light-hearted gimmicks to engage customers and encourage activity with which Robinhood particularly distinguishes itself from competitors. It appeals to the conviction among many younger traders that financial markets are a rigged casino, blending it with the popular pastime of video gaming. It’s not entirely dissimilar to the enthusiasm for bitcoin—and not entirely alien even to libertarians—substituting hostility to Wall Street for distrust of fiat currency, and focused not on avoidance but retaliation, participating in the rigged game to seize a just share of the ill‐​gotten gains.

The social psychology of Robinhood’s customers isn’t surprising in a time of diffused hostility, a mood of generalized rejection and opposition, and the emergence of social media. It contains a strong political undertone focused on many objects apart from the finance industry. The focus in the GameStop episode has been on protecting young investors from the behavioral stimuli said to be embedded in trading apps in order to encourage frequent trading and earn PFOF (Payment for order flow is the practice of wholesale market makers paying brokers for their clients’ order flow).

The consumer‐​protection regulatory strategy is to identify and expunge all conflicts of interest. Then retail investors will have the same accurate information and engage in stock/cryptocurrency picking on an equal footing with the pros. The goal is “democratizing access to the financial markets and creating a level playing field for everyday investors” (Kelleher and Cisewski 2021). But then, who will monitor all these except those with conflicts of interest? You would invest time in improving a system because you are also interested to gain from it.

Final thoughts

Even more than other investors, young investors must be protected from their own bad decision-making, and from misleading advertising (e.g., Robinhood’s confetti). Robinhood’s defense has been that it is not a financial advisor, but only a broker and platform operator. But who will monitor those who are on the cutting edge of the industry, those who are “behind the scene”?

High‐​frequency traders (HFTs) withdrew during Robinhood platform outages, a clue that Robinhood traders are uninformed, since HFTs anticipate losing money when they are trading primarily with better‐​informed counterparties.  Ordinary investors, outsiders, are misled and impeded by the finance industry from obtaining the “special” information needed to invest successfully. But nothing could be further from the truth than the view that the typical successful investor “beats the market,” trading frequently on superior information.

The GameStop drama serves as a timely reminder of the stock market’s intricacy, volatility, and potential effect of unanticipated events on stock prices. The same goes for those flaunting caution and going with the mob when choosing cryptocurrencies to invest in. Staying dedicated to the values of fairness, transparency, and responsible investment is essential as investors and market players continue to adapt to the changing situation.