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GameStop & Robinhood: Biggest Crypto Advertisement EVER

GameStop & Robinhood: Biggest Crypto Advertisement EVER

GameStop and Robinhood.

GME went from about $20 a share to … $400!

Then the trading app Robinhood says: “You can’t buy or trade, only sell.”

What?!

“For your protection.”

This crazy move is getting a lot of attention this week. But what it really screams to us is that you need to buy crypto.

Here’s our big take on GameStop and Robinhood. And why we believe this will go down in history as the biggest crypto endorsement ever:

GameStop Stock: What Happened and What it Means

Paul: We should get right into it. I’ve gotten a lot of comments on Twitter. I’m sure the email inboxes will be full. We need to talk about what’s on everyone’s mind: GameStop. GameStop again. Then GameStop. Then AMC, Nokia, Blackberry, Robinhood shutting people down and other brokerages shutting people down and all the stuff going on.

We’ve been talking about this on Slack. Tell people what you think. Then let’s breakdown why this happened, how this happened and what we think is going to unfold over the next days and weeks.

Ian: Essentially to me what this all is is the biggest advertisement for crypto and decentralized finance (DeFi) I have ever seen. You had GameStop pumped up from $10 to topping out at $500. Then basically all the exchanges came together and said, “You can’t trade this anymore. You can’t buy it. You can only sell it.”

I heard Robinhood actually sold people’s stock for them, “for their own good.” I don’t know the truth of that, I don’t know if that actually happened, but at this point it wouldn’t even surprise me.

Another thing I saw that is crypto-related and related to this is that there is an exchange called FTX that basically makes a tokenized version of a stock so you can trade a stock on a crypto exchange.

They made their own version of GameStop, AMC and these other stocks that track along with the price. You can go to FTX and trade it. You can buy it, sell it, no restrictions. Everything is decentralized. I think that’s where we’re moving.

I saw Bitcoin (BTC) is up today. I wonder how much that has to do with this whole GameStop ordeal and these exchanges limiting what their customers can do.

Paul: To track this back, I am going to break down what happened with GameStop and how it ended up going from $5 in March last year to $508 at the peak. Who knows where it will ultimately peak out. The backstory to this is there is a social media app called Reddit.

On this Reddit app was a subreddit called Wall Street Bets (r/WallStreetBets). Without knowing each other, they all worked out that the big hedge funds were short GameStop in a big way.  Shorting is something that’s generally done by big-money players in the markets.

In other words, they sell GameStop — it could be any stock, could be silver, could be gold — in anticipation of buying it back cheaper in the future. In this case, they have been selling GameStop, which they do not own. That’s called a short bet.

The idea behind that is they will go and buy it back cheaper in the future. In this case, with their models and research I bet that number was zero. They were relentlessly willing to sell the stock they never owned.

They believed they were going to buy it back at zero. They kept shorting it. The exchanges allowed this to the point where for every share of GameStop, they allowed these hedge funds to be short one-and-a-half shares. Ian, this seems pretty straight up to me.

This is actually common. There are plenty of stocks that are sold beyond the number of shares outstanding and the exchanges have never chosen to crack down on it. The government and the regulators have never chosen to crack down on it. The brokers that served the hedge funds?

It’s totally cool with them. We’ll get to the second part of the story where it’s suddenly not cool with them. We have seen lots of situations where this has persisted. I know of at least three or four companies that have had their entire float shorted and doubled for years and years.

Ian: We have been talking about this with GameStop between you and I for a while. We said if it ever popped off it would be huge. Then when you get a community like r/WallStreetBets, if you are familiar with it you know the people in there are very set on what they want to do.

If a few people join in a trade and people see it take off, everyone joins in. That’s essentially what happened with GameStop. You get a huge community behind this trade and it’s finally enough to break the system where they can exploit these huge short moves by all the hedge funds.

Paul: Essentially they shifted the balance. In truth, we had GameStop in one of our services and, sadly enough, we sold it. I was unaware that this momentum was building on Reddit for GameStop. It shifted the balance. There were a number of events that lead to this.

WallStreetBets

First, WallStreetBets begins to workout the imbalance in the short position for GameStop.

Millennials and Gen Z Stock Traders

Then it’s also a stock that many millennials and gen z — the folks who are on Reddit and WallStreetBets — it has resonance and nostalgia for them.

They have gone to buy video games themselves. They understand the company because they have been in GameStop stores. They understand what they do. So you have this combination of a huge short bet that is imbalanced to the short side. The powers that be have said that’s fine.

You have a small market cap for a company that had a ton of cash on the balance sheet. They were in no danger of going bankrupt anytime soon. We were aware of that because we had this position. They were generating free cash flow from their business.

While their business is on a long-term track to, perhaps, zero, it was very unlikely to happen in one year, two years or three years. It was going to be a slow decline. They have plenty of cash and their existing business continues to generate some amount of cash for them. So they have that going for them.

Small Market Capitalization

Then a very small market capitalization or stock market value, I think $200 million at the low. Then you put all this together. When people start to work that out, they worked out things hedge funds pay analysts to work out. They take the trade and Wall Street Bets worked it out.

In an uncoordinated fashion, they all went in and started to buy GameStop stock, buy call options on GameStop, which also put additional pressure on the stock. Call options, for those who are unaware, are securities you can buy using very little money and allow you to control a lot of stock.

For example, if you wanted to buy one share of GameStop when it is at $200, you have to put $200 down to control $200 worth of stock. However, using the option market, with $200 you might have been able to control $1,000. Or in the right situation, as much as $2,000.

Maybe even $5,000 worth of stock. It’s a leveraged bet on the price of a security. So it was a combination of these things. They bought GameStop, they started to buy call options and it was a series of a lot of trades of probably — what would you guess the average trade was? Couldn’t have been more than a few hundred dollars apiece.

Ian: Exactly. At the start, that’s what it was. You had some people who have been holding for a while, but that wasn’t many. I think most people who bought GameStop have done it in the past couple of weeks.

Paul: Then there were some other big events that occurred. GameStop started to buy back their own stock to shrink their float. Then the guy who founded Chewy cashed out of Chewy and took a very large stake in GameStop. He took a lot of float off the market that was locked up and unavailable.

I believe one of the guys from the big short who shorted the mortgages and stuff like that — Michael Burry — was also long GameStop in a significant enough amount that once this momentum started to roll this all mattered. In a space of three weeks, GameStop went from $10 to $100, then to $200, then $500.

Robinhood’s Wrongdoing?

Ian: With these exchanges it has gotten very interesting. Again, I think this is a great advertisement for crypto. It’s a great advertisement for a decentralized exchange where they don’t have the power to tell you that you can’t trade a certain stock. Nobody ever thought that would happen.

But it was OK for these hedge funds to short one-and-a-half shares that didn’t exist. Yeah, I think it will cause a lot of people to look at these decentralized exchanges.

Paul: Let’s talk about this issue. I have gotten a lot of tweets about it. Is it right for Robinhood? Yesterday I got multiple text messages from friends who said they were shutting down trades in all the stocks that people worked out the hedge funds are short. That was stocks like GameStop, AMC, Blackberry and Nokia.

These seem to be the ones that were primarily targeted. Then Robinhood put restrictions on another four or five stocks, which was crazy. The idea is that they are doing this “for your protection.”

Ian: You can’t buy it “for your own good.” You could only sell it.

Paul: Personally, I believe what they was unfair and wrong. Even the coordination that happens on coordinating stocks, I can tell you the hedge funds and others — it’s unlikely GameStop got shorted to this extent or that somehow all these trades got shorted without any coordination from these hedge funds.

Ian: Exactly.  You have worked in this industry. We were talking about this yesterday where they communicate to each other all the time. They can gang up on a stock like this and drive it way down and create a huge imbalance in the market.

Paul: Correct. They can essentially become the market where by taking in all the buy orders from retail traders and wiping them out, they can become a relentless selling machine to give you the impression there is no demand for the stock. That is going to trigger trailing stops that a lot of people use.

And just mentally make it where people understand the stock is undesirable. In the end, for most people the benefit of a stock is to see its rise and to have the opportunity to make a profit. They get that completely.

When I look at it, essentially Reddit, r/WallStreetBets and millennials have worked out what everybody has done forever. When they go to do it to the other side apparently that’s not OK. In other words, the people’s hedge fund is bad. Rich people hedge funds? Good. Whatever tactics they use are OK and they shut trading down for that.

However, if people work out how to squeeze the other side through perfectly legal means that are currently used by every hedge fund, that’s somehow bad?

Ian: It’s unbelievable it would happen. It’s not helping their case either. I wonder how many people are cancelling Robinhood because of this.

Paul: I have a small account at Robinhood. I got all the emails. Then they sent an email yesterday late after they probably saw hundreds of thousands of negative reviews show up on the Google Play store and the Apple App Store. Somehow they have all been deleted.

I read at one time it was nearly 250,000 reviews on the App Store. Apparently that’s been deleted. Nonetheless, they are going to see mass withdrawals.

Ian: I think on the Google Play store if your rating gets low enough you get taken out of the store. I don’t know if it’s on track to do that, but that would be crazy.

Paul: It’s interesting that all these things are going on. The email from Robinhood said they are going to restart limited trading in all the stocks that restricted. To be fair, Robinhood is not the only one. Webull, TD Ameritrade and pretty much everyone that is widely used by these traders chose to shut down trading in these stocks.

They never gave any reason for it. The Robinhood email was interesting. They still claim they are all for democratizing finance, stocks and investing and in the same email said they had a number of business things to take care of, some capital requirements, etc.

However, we can discuss what everyone was talking. Why is someone like Robinhood choosing to do this? Most people are unware how an order gets filled. You put your order in and it goes to someone who they have sold that order to who fills it for them.

If people are relentlessly putting an order in, then they have to go get this stock from someplace. If the stock is short in a big way like GameStop, now you put a tremendous amount of pressure. They themselves have to go short to fulfill your order. Or else they have to go into the market and get stock to fill your order.

I see no problem with the second part. People are willing to pay rising prices for it. You read r/WallStreetBets?

Ian: Yes, I do.

Paul: And I have been on YouTube and Twitter. When I read these folks they seem to be perfectly aware of the risk they are taking. They are aware that many of them may make no money on the way out. In other words, if everyone sells, they will lose money. So I have no idea what’s going on.

Ian: That’s an interesting aspect also. They would have to go get those shares. I did hear at least three or four hedge funds got wiped out from this one trade because they had such heavy shorts on GameStop. They had to buy it back at a really high price. There were shares out there.

I don’t know if that was the case with Robinhood. I did see it was halted on Interactive Brokers. It never got cancelled on there but it was halted at least 10 times yesterday.

Paul: That’s a discussion for another time. I can explain a little what they were trying to do with that. The net sum of why they halted it is because then they could show — essentially what was shown to the market was only sell orders. When you only show sell orders you show a progression of lower prices.

This would reduce the demand for the stock. However, I saw lots of people send me picture of all the buy orders stacking that were never entering the market because of these halts. We are now getting very deep into the thickets of how Wall Street works, how orders are shown and how price patterns can be illustrated to show a certain reality.

In other words, the order in which you show buys and sells can influence the number of orders that are going to come in on either side. All of these things matter. One of the theories that’s laid out, and it would seem to have credence, is that the market makers had to have been short as a result of the rise that had come.

In normal times they would say, “This is unsustainable.” So you would take the other side and go short. Now they have made a bad bet and it might have been the issue.

Ian: It might have been. It’s hard to say. It does go deep into the mechanics behind the market.

Paul: If this was reverse and some hedge fund had worked this out and bought a ton of calls on GameStop and they were getting the benefit of 5,000%, nobody would be blinking.

Ian: Exactly. That’s what it comes down to.

Paul: It would be totally OK. They would say, “That’s a market. There’s a winner and a loser. Be a big boy and take care of your problem.”

A Solid Case for DeFi and Crypto

Now let’s talk a little about what you were talking about: DeFi and crypto. This is absolutely an advertisement for non-centralized exchanges where no one controls what goes on. You mentioned FTX. Patrick Goodrich, our incredible colleague, mentioned this to me.

The volumes on GameStop, AMC and others on FTX, have you tracked to see if they have been rising and what is going on?

Ian: Yes. It has been a popular thing for them. One of their most popular — I guess you would call it a coin. It’s a token that follows the price. IT’s been one of the most popular investments on FTX. It’s interesting.

Paul: I know it’s related, but unclear how, it’s now set the crypto market on fire again.

Ian: Right. BTC went up overnight, which it hasn’t done in a long time. It means international buyers are back. It’s been weeks since I’ve gone to bed and woken up and the next day BTC was up. That’s a good sign. It sets the stage.

I think today is going to be a good day for BTC. On a more complicated level, there’s a big futures and options expiration date today. A lot of bigger funds buy a lot of options and futures on BTC to make a leveraged bet on the future price. Those all expire today and a lot of them are expiring at a loss.

They will have to readjust their portfolios and buy BTC to balance that. I think that is driving demand as well.

Paul: You put up a tweet showing this huge imbalance. Once again, it does look like the hedge funds when I look at the data are short on BTC.

Ian: The one I posted showed they were short, net $1 billion. I think they were short $1.6 billion and long $600 million. That could be another potential short squeeze because they have so much on the short side in BTC.

If they see too much of a loss there and it’s leveraged so it would be bigger than it appears in the market, they are going to have to buy that BTC back and cut their losses.

Paul: The BTC trade is very much like the GameStop trade. There is a limited supply — 21 million max, of which only 18.5 million is available. It’s believed as many as four million coins have been lost or destroyed.

Then you have people short in a big way in something that is in limited quantity that people are continuing to buy around the world. It definitely sets up for where BTC can rise precipitously. People are seeing what happened with GameStop.

This is the first time a short squeeze of this magnitude has been seen in the market for maybe 30 years. I have read in some of the books of some historic short squeezes and GameStop is up there. However, there have been much bigger ones in the past which went up 50,000%.

It’s interesting today that very few people remember. It’s unclear what the authorities and markets did and the people who managed this did, but they definitely did change the rules on the fly. It is something that is a risk if you don’t represent the big money.

Ian: What r/WallStreetBets shows too is that this community is big money. If they can turn a trade and make it this big and drive a price from $5 to $500 in a matter of weeks, that’s big money too. As more people gain access to information like this, for all the stuff that’s on r/WallStreetBets that’s kind of iffy, as a community they are intelligent.

They can figure this stuff out. It should put some fear in hedge funds to think about doing these crazy things again. People are smarter than they give them credit for. I will just put it that way. GameStop is a big example of that.

AMC, Blackberry and these other companies that everyone thought were dead, it shows you if the investment community realizes this as a whole it can change things on a big level.

The Millennial Market Takeover

Paul: We talked earlier about this marking a shift in power to the millennial generation in terms of the economy, the market — and gen z. Together they represent more than 50% of the country and they are beginning to flex their power through things that — I’m sure there are people who understand this and are a bit older and this is no knock on them.

Nonetheless, if you are under probably the oldest millennial is 40, you have grown up with the idea of social media and devices being around you. This is something that is very much of their time.

I believe while many people think this marks the top and they are comparing it to 1999, we see no real signs of that other than these specific stocks where people have worked out their a massive short in it. Really, it’s a perfect opportunity. It’s how markets are supposed to be. You see opportunity, you see an imbalance, you take a risk. The idea is, you get rewarded for it.

Ian: Exactly. And that’s what they did.

Paul: It’s largely millennials and gen Z. They have taken stimulus checks and small amounts of money and, in some cases, turned it into huge amounts of money.

Ian: I saw one guy has been holding GameStop for a while and at the top he had more than $40 million in GameStop.

Paul: That’s fantastic. I know some people think that’s terrible and horrible. Nonetheless, from our perspective, we feel like they did the work, they took the risk and they deserve the reward. I have no sympathy for people who think money making is somehow entitled to the super rich or big money.

If you are willing to take the risk, do the work and you make the money, you deserve it. That’s capitalism. That’s the markets.

Ian: Agreed, 100%.

Paul: This power shift is moving. Millennials are using social media apps and these connections where, without coordination of any kind, they can be onto a stock where they can move it. People will only find out later on they coalesced informally in some of these places.

It does mark a move of power. Information flow was guarded by Wall Street, their investment banks and the press. Now it’s really dissipated. Anyone who can work something out can present it in a forum where other people can read it. If it makes sense to them, they can choose to act upon it.

I feel that should be something we should be completely OK with. People who make that bet should make their money.

Ian: I think it’s a great thing. It shows people can share information that is valuable and exploit these inefficiencies in the market. It never should have gotten to the point where 150% of the float of GameStop was short. I think, like I said before, it’s going to reduce the ability for these big funds to gang up on stocks like that.

Paul: It does also mean in stock investing and crypto investing there are opportunities to get in that were previously reserved for very rich people, people who had access to these elite advisors, etc. Nonetheless, this crowdsourced intelligence can come up with even better ideas that they are willing to give to everyone.

All you have to do is determine if the idea has credibility and if you want to risk your own money. That is the one thing I want to say. When I watch YouTube, I’m on Twitter or have seen screenshots of the r/WallStreetBets things, everyone is aware of the risk they are taking.

No one is asking for a bailout. No one is saying they are entitled to these gains. I really think what Robinhood and others are doing it counterproductive.

Ian: I agree. They are finding that out now with all those one-star reviews.

Paul: We’ve gone on a great deal. Let’s quickly wrap up how we see this unfolding and potentially ending.

Fuel for Decentralized Exchanges

Ian: I am going to look at volume and new users in these decentralized exchanges. FTX is an example I mentioned. There’s also Uniswap, they are probably the biggest. There’s SushiSwap. There are a few others that are smaller, but those are the top three for sure.

They bring in huge cash flows just from trading fees. They are not a typical business but it’s a huge deal for a decentralized exchange to become functional like this. I think they are going to drive a lot of demand. Not only for business for new traders to come in, but it will also drive up demand for coins for these.

Paul: Uniswap’s coin, Uni, was being bid up while all this was going on. In all likelihood, not a coincidence.

Ian: Yes. And I saw FTX’s token went up 30% yesterday.

Paul: There are others including Doge that have also gone up. We have no opinion on that. That one I think is something else going on. A lot of people are texting me about that. We think this represents an enormous opportunity about DeFi where people can’t kick you off or restrict you from trading when the basis is completely legal and by the rules.

Personally, I believe the stock market is going to have to allow these to trade. They are going to have to allow these hedge funds to take their losses and raise capital. Melvin Capital was famously short on GameStop and apparently needed an infusion from two other hedge funds to stay alive and cover their short.

There’s plenty of money in the world. The rich folks have plenty of money. They can subsidize these hedge funds and take care of it. They are not lacking for capital. We believe it represents no systemic risk of any kind. There’s plenty of capital in all the places, whether it be market makers, investment banks.

No one is short of capital. This will probably go on for a little bit. Then, in the future, every hedge fund will probably start watching social media to see what’s there. They will also stop doing things like going over 100%.

The other thing which you will see as well because you run two of our options services — Rapid Profit Trader and Rebound Profit Trader — option prices are going to start to go up for call options because people will start to see a risk associated with this.

Ian: Right, especially options for heavily shorted stocks. It’s only a matter of time before we see exchanges reverse this. I think that would be good news for these other beaten-down stocks.

Paul: Bottom line, this is going to continue for a while. However, it will get quieter. The surprise of it is always something that gets a lot of attention. I will also be on Monday Market Talk with Amber and we will talk more. We asked folks to write us on Twitter.

If you had additional questions, put them below in the comments. We will try to address them on Monday when I will be on with Amber. We have not covered Tesla or cannabis but we have run long. We will leave that for next week. Any final thoughts on any of this before we end?

Ian: Just that I am excited to see where this takes decentralized exchanges. I think it will garner attention for those and I have been waiting for a moment to see decentralized exchanges hit the mainstream, which they haven’t yet. I think we are on the verge of that now. I am excited to watch that unfold.

Paul: For my part, I have to say I love all these images of regular people making $30,000, $40,000 and you said millions. There are a lot of regular people making money and they did it by the rules. They did it legally. They did it using brainpower. They did it with effort.

It’s awesome and it was just about time. That’s an awesome thing to see.

Regards,

Ian Dyer

Ian Dyer

Editor, Rebound Profit Trader

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