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Is the GameStop dream dead? Shares plummet nearly 75% in two days

Published Feb 2nd, 2021 3:13PM EST
GameStop Stock
Image: ZUMAPRESS.com/MEGA

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  • GameStop shares are down more than 70% over the last two days.
  • As hedge funds and short-sellers attempt to close their positions, GameStop shares have continued to fall.
  • Netflix is already planning a movie about how Redditors managed to almost bankrupt a multi-billion dollar hedge fund.

The GameStop saga, which has seen an army of Redditors take on well-established hedge funds, might finally be starting to circle the drain. After closing at $347/share last Wednesday, GameStop shares are now trading in the $93 range. At its peak last Thursday, GameStop shares were trading at $482.

According to financial observers, the steep drop-off was inevitable once hedge funds with short positions on GameStop applied pressure in an attempt to close their positions.

Amid all the chaos, some hedge funds lost huge sums of money in a remarkably short period of time. Melvin Capital, for example, lost billions of dollars as shares of GameStop started to skyrocket. Eventually, Melvin Capital was forced to secure outside funding to the tune of $2.5 billion to help it remain afloat. All the while, some Redditors who got in on GameStop early on managed to make in profit.

While many posts on the r/WallStreetBets subreddit are still urging shareholders to hold their positions and not sell, the strategy of buying and holding GME shares worked mainly due to the immense short interest in the stock. As short interest in GameStop inevitably wanes, so too will the ability for Redditors to mobilize en masse and drive the price of the stock higher and higher.

Consider this: short interest in GameStop shares a week or two ago was in the range of 140%. Today, short interest in GameStop is reportedly around 40%. Put simply, the power Redditors wielded even just a few days ago has dropped precipitously.

What started as an insanely entertaining and unlikely story about the masses taking on massive hedge funds has, in effect, turned into something of a Ponzi scheme. Put simply, investors who decided to invest in GameStop as the stock inched closer towards $500 a share were simply shoring up profits for earlier investors who had the wherewithal to buy early and sell high. These late-stage investors, meanwhile, will likely lose big as GameStop shares continue to sink.

Of course, the entire saga has raised a multitude of questions on a range of issues.

The New York Times writes:

When the GameStop music ends, there will be big losses and finger pointing. The speculators rarely blame themselves. Were brokerages too lax in allowing retail investors to trade options using leverage? Should the stock exchanges have jumped in? Where was the S.E.C.? And backers of GameStop may ask why more than 100 percent of the company’s shares could be shorted in the first place: Isn’t that manipulation?

Meanwhile, two films about the Reddit vs. Wall Street saga are already in the works. One is set to be produced by Netflix while the other will be made by MGM.

Yoni Heisler Contributing Writer

Yoni Heisler has been writing about Apple and the tech industry at large with over 15 years of experience. A life long expert Mac user and Apple expert, his writing has appeared in Edible Apple, Network World, MacLife, Macworld UK, and TUAW.

When not analyzing the latest happenings with Apple, Yoni enjoys catching Improv shows in Chicago, playing soccer, and cultivating new TV show addictions.