How Gamestop Sped Up the Coming Crypto Revolution
What a mess. If you pay attention to the news and/or the markets, the past few weeks have been a whirlwind.
Let’s start with a quick recap for context:
In the organized, professional investing world, there are frequently “forums” held to discuss and share investment ideas (creatively termed: “idea dinners”). A similar forum for sharing investing ideas popped up on Reddit in the form of the r/WallStreetBets group. The difference? These were retail investors from far and wide getting together on the internet, no fancy suits or connections required, and the discussions were being held “in plain sight” on the reddit board - anyone could observe or participate.
In this democratized online forum, a trader by the name of “DeepF****ngValue” shared an idea on Gamestop – he outlined what he saw as a long-term value proposition and bought loads of the stock with the expectation it was undervalued and would go up over time. This was back in June 2019, and it wasn’t such a crazy idea. Later in 2019, well known value investor Michael Burry (of “the Big Short” fame) bought a stake in Gamestop, highlighting the fact that 90% of Gamestop’s stores were cash-flow positive (i.e., 90% of the “dead” brick and mortar stores were actually making money).
The hedge funds did not agree. Wall-street apex predator funds Melvin Capital and Citron Research – these guys make their money by destroying companies through aggressive “shorting” (the act of betting a company’s stock price will go down) – bet BIG that Gamestop would go bust. They bet so big, that they were in fact short >100% of the possible shares in the company (they had “sold” more shares than were even in existence)!
But they were wrong. The reddit buzz spread, retail investors continued to pile into Gamestop, and the hedge funds were reeling from losses on their short position to such a degree that other hedge funds (Point72 and Citadel, their buddies) had to come in and bail them out to the tune of a couple billion dollars.
Then, the real scandal occurs… on Thursday, January 28th, Robinhood and other retail-focused trading platforms restricted trades on Gamestop, as well as other companies that were being “squeezed” (term used for when the people betting short have to give up and take big losses) by these everyday investors. That Thursday, if you were a trader or investor on Robinhood, you were only allowed to sell the shares, you weren’t allowed to buy – even if you had the money ready.
Why was this a scandal? Well, Robinhood and other such platforms have long touted their mission of “putting your financial interests first”, they don’t charge you any trading or transaction fees, which seems pretty nice right? How do they make their money though?
They make their money by selling your data (in this case, the actual trades you’re making, before the platform executes them) to the very same hedge funds that might be on the other side of the trade! That’s right, these firms get what’s called the “order flow” data milliseconds ahead of when your trades are executed, allowing them to trade ahead of you and make money (also called “front-running”). Moreover, Robinhood will frequently loan out the actual stock shares (your shares!) to these same hedge funds so they can take the opposite side of the trade (e.g., going short). They make a tremendous amount of money from this… in fact Citadel – one of the funds that helped bail out the folks short on Gamestop – pays Robinhood over $10 million for this order flow data each quarter (three-month period)[1].
While we don’t have all the information about where the decision to restrict trading really came from… this whole saga stinks to high heaven. It looks remarkably suspicious that Robinhood, who is one of the largest beneficiaries of Citadel and other hedge funds, would take away the “buy” button at a critical moment on stocks that these same hedge funds were betting against…
At the same time as trading platforms were shutting down the buy side of the trade, the wallstreetbets forum was being forcibly censored (“for the people’s own good”) on sites such as Discord and Reddit.
The stink of the whole thing wasn’t lost on the internet… The veil had been blown away. For the first time, people everywhere could see just how deep the rot and the unfairness runs in the current financial system. We always knew it was rigged, but now the rigging was happening in broad daylight, and affecting people’s real-time ability to make decisions with their hard-earned money on platforms that were supposed to be there for the little-guy, not the hedge funds!
What does all this mean? Well, I don’t think you could have devised a better advertisement for the crypto ecosystem even if you tried.
Here in crypto-land, we have been building the infrastructure that solves these problems. Here, everyone plays by the same rules. Nobody, and no asset, can be arbitrarily censored by the “powers that be”. The system cannot be controlled by any one person. The people are the powers that be. That is called decentralization.
On new decentralized platforms like Uniswap, anyone can trade any (supported) asset at any time, without the permission of anyone else. You cannot be censored or de-platformed. Whether you have $100 or $100 million, over here we all play by the same rules (and can earn the same passive income!). Usage of these platforms (for both trading and income generation) has been growing exponentially, with total value exceeding $30 billion at time of writing[2].
I believe the last few weeks were a significant chapter in the story of crypto’s adoption. What these events revealed is just how many people out there want to “fight the system”, or at least believe things should be better.
When people saw buying Gamestop as a way they could finally “fight”, they piled into the stock, making it the most traded stock in the whole market for a week straight (over the likes of Apple and Amazon, which are hundreds of times bigger). Unfortunately, many of these people have realized bitterly that nothing will change as a result of buying a few Gamestop shares. As we’ve seen, the suits are still in complete control.
There is a better way to fight though: instead of buying meme-stocks in a rigged game, we can actually invest in the replacement infrastructure being built at this very moment, and stick it to the legacy system for good while making a lot of coin in the process and progressing towards our financial goals. This is crypto. People will come for the narrative around creating a better system than the one that has repeatedly failed us, and they’ll stay for the powerful monetary benefits.
We’ve been seeing this play out first hand. Earlier this week, Tesla Inc. became the latest (and largest) addition to a growing list of companies that have made the decision to hold Bitcoin on their corporate balance sheet.[3] They see the movement coming, and they don’t want to be left behind.
If you’d like to learn more about fighting the good fight while reaching your financial goals, I invite you to schedule a free consultation with me today. The future awaits us all.
[1] https://www.cnbc.com/2020/08/13/how-robinhood-makes-money-on-customer-trades-despite-making-it-free.html
[2] https://defipulse.com/
[3] https://www.cnbc.com/2021/02/08/tesla-buys-1point5-billion-in-bitcoin.html
