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Is Bitcoin the next GameStop? Read on to find out.
What Happened with GameStop?
GameStop, a gaming retailer, was on the decline since 2015. Their brick & mortar business model could not compete in the online e-commerce world, leading many to think that a new Blockbuster-Netflix situation might happen. Plus, the pandemic’s added impact hit them hard, causing their stock price to plummet to a few dollars. Hedge funds like Melvin Capital and Citron started shorting their stock.
What’s shorting?
Shorting is essentially betting against an asset. In this case, hedge funds saw they could make that money on its declining stock price. When shorting, an asset is borrowed from a lender to be sold on the market immediately. Once its price goes down, you repurchase the stock at that discounted price and return it to the lender, keeping the difference as profit. However, unlike betting on the long, there can be infinite losses associated with shorting as an asset’s value can go up to any level. Some Redditors saw this as an opportunity for a short squeeze.
What did the Redditors at WSB do?
Towards the end of 2020, the company started doing well for itself. Investors started coming in, sales were looking good, and the stock price went up a bit. But short sellers started shorting their stock even further to bring the stock value down. When a borrowed stock is sold, anyone can short it again and again. r/wallstreetbets’s (WSB) retail traders saw that the stock was heavily shorted, even more than the floating stock.
These members organized themselves and started holding GameStop’s stock, causing its price to shoot up. Because hedge funds needed the stock to return to their lenders, they quickly started buying stocks at a price much higher than their starting position. They were driven out and had to endure heavy losses, amounting in the billions, while some Redditors became millionaires,
Bitcoin Shorting
The battle between retail traders and institutional investors has sparked concern in the financial sector. They underestimated the power of social media-driven influences on asset prices. It may indicate what’s to come in the future for Bitcoin.
According to Bit Signal, hedge funds’ shorting of bitcoin has been steadily increasing for the past couple of months. However, it is not a recipe for disaster as of yet.
Supply and demand
Shorting created an enormous supply and demand gap in GameStop’s stock leading to the short squeeze. A similar problem may emerge as Bitcoin gains mass adoption. There are about 18.6 million bitcoins in circulation; however, Bitcoin does have a cap of 21 million.
Individual investors were already jumping the bandwagon betting on the long, but other institutional investors are also showing interest in Bitcoin given its newfound reputation as a reliable cryptocurrency. Even some cities are promoting the currency.
Slowly, Bitcoins in circulation will come to a halt. Right now, short-sellers may have an escape as new bitcoins come into circulation. Hedge funds are probably betting on its colossal price differences within short periods, but that might soon change as volatility decreases or bitcoin reaches new resistance levels. In that case, a new situation like GameStop may emerge, and this time they may have to face even higher losses.
Final Thoughts
Short squeezes are not a new phenomenon. Historically, short-sellers have always had a villainous perception in the trading community as companies and retail investors do not like the idea of people betting against a company. Shorting assets comes with its risks, and there have been many instances where a short squeeze has caused investment institutions to go bankrupt. It’s too soon to tell if Bitcoin will experience a similar scenario, but looking out for patterns may help us understand these situations better.
