I had originally written this a part of a post, but then I my writing diverged from my original topic, and realized that this isn’t really connected to the original post.
GameStop, GME, has had a hell of a run, being up 1625% per the below chart over the past month, largely due to people on Reddit trying to stick it to those shorting the stock. I can certainly see the case for shorting GameStop, and perhaps if I were a more serious investor, I would have.
GameStop has a declining brick and mortar business model in a business where people now increasingly buy their games online. They also have a used game business that basically causes everyone to hate them. The game companies hate them because they don’t make any money off used video game sales, and the customers, who are the ones trading their games, hate them because the game they bought from them a month ago new is now worth half or less of what it was. Why anyone would actually like this company is a bit of a mystery to me.
If I had to choose between call and put options for company, I would have definitely been on the short side with put options. It appears though in the case of GME, the shorts went a bit extreme, with over 100% of the company stock being shorted. Reddit posters saw this and pounced on the opportunity to screw over the hedge funds that were shorting the company. Melvin Capital lost more than 50% of its value over the course of January due to their GameStop short positions. Power to the people.
In response to this frenzy, some trading platforms, such as Robinhood, have blocked their customers from buying the stock. Robinhood is potentially looking to go public, so they need the same hedge funds who are now getting screwed by the GME trade to back them up.
Even though Robinhood’s whole ethos was to give the little guys the same tools as the big players, when the hedge funds started kicking and screaming, Robinhood was quick to take those tools away. This is probably one of the better examples of the system working to maintain the status quo and the resulting inequality, in spite of Robinhood’s whole claim of fighting it.
Decentralized Finance, or DeFi, and cryptocurrency might be the solution to this. It appears that some of the Reddit investors who were blocked from trading their GME on Robinhood have moved to Dogecoin. Uniswap, a decentralized trading platform, had its base token ICO (initial coin offering) back in September 2020 and was trading for around 30 cents, as I write this at the end of January 2021, it is at $18.
With DeFi, you lose the central authority who decides who gets trade and who does not, but you also lose the regulatory ‘protection’ that comes with the SEC and the OCC. Indeed, that lack of regulatory environment means that many of the coins listed on Uniswap have turned out to be outright scams. On the other hand, the barriers to entry for a legit company trying to go public are a lot lower if you can do it via an ICO.
For me, at least for now, the risks of investing in ICO’s and DeFi generally outweighs the rewards, hence DeFi is not a significant portion of my portfolio. It is, however, something to keep an eye on going forward.
Disclaimer: Investing involves risks, and nothing in this post should be construed as financial advice. Risk of investments includes the loss of principal, which I can’t assume liability for. Please consult with an actual financial advisor for advice.