Reddit bankrupts at least one hedgefund: An explanation by AoShin

serenata-your-neighborhood-lefty:

Alright kids, sit down while I tell you what on earth is happening.

It’s a once in a lifetime historical event. It’s insane.

At least 1 hedgefund has gone bankrupt, thanks to a group of average joes on Reddit.  By the end of the week, there will be a line of bankruptcies. 

So let’s start at the beginning:

First of all, stocks are pretty simple, when they go up in value, you make money, because it’s worth more than you bought it for. Stock goes up- you make money.
Stock goes down- you lose money. 

Short selling is the opposite. Short selling makes money when the stock goes down in value.

Short sellers borrow someone else’s shares, and sell them, with the goal of buying them back later, and pocketing the difference as profit.

So, Tim borrows Bob’s shares in GME, and sell them for $10, he pays Bob $1 to do this, and promises to give all of Bob’s shares back. Then, if the stock goes down to $5, Tim buys the shares back at a cheaper price. So Tim’s profit is $10-$5-$1 = $4 profit. 

So that’s where we start. A hedge fund tried to force down the price of Gamestop, and short the stock. It usually works fine. It’s been done thousands of times, with no problems.

So they shorted Gamestop (GME) from $20, to $10, to $4. Their greed kept compounding. They kept doing it again, and again, for months. Making billions of dollars, and almost bankrupting this company. 

Enter Wallstreetbets. A trading/investing subreddit. 

Someone noted that these hedgefunds shorted 140% of all shares available.

These hedgefunds were so damn greedy, they borrowed more shares than actually existed. That’s how arrogant and dumb they were. They borrowed 140% of all the available shares. It was literally impossible for them to buy them all back.

So someone on Wallstreetbets realized this, and told everyone.
Now, the rule with short selling is that ALL those shares that they borrow, MUST be paid back.

And so we reach our main story of how the hedgefund’s greed ruined them.

Realizing that these hedgefunds shorted GME by a ridiculous amount, these Redditors (a bunch of regular Joes like you and me), bought every share they could get their hands on. Driving the price up as much as possible.

Why?

Because these hedgefunds eventually (within a few months) HAD to buy all those shares back, at whatever price they could get them. They didnt have a choice. 

 So if they borrow a million shares, and sold them for $10. They made $10 million in immediate profit. But eventually, they HAD TO buy those million shares back. They didn’t have a choice. That was the deal they made when they borrowed the shares. 

So these Redditors bought the shares, driving the price up, forcing these hedgefunds to buy back at crazy prices.

Yeah, the hedgefund sold and made $10 million, but now they had to spend $147.98 million getting those same shares back. A HUGE FUCKING LOSS of $137.98 million.

So eventually, the due date for when these hedgefunds need to return the borrowed shares comes closer. 

And what do they do?

They double down.

They short MORE. Because they’re sure that they can manipulate the stock enough to get it to crash, thereby saving themselves. 

 Fastforward a few days, every attempt to crash the stock fails.
Oh it works temporarily, but not enough for them to save themselves.
Everyone knows what theyre trying to do, so people keep buying the stock.
And with every additional bit of media attention, more and more people are buying the stock, destroying the greedy hedgefund in the process.

Eventually Melvin Capital- a multi billion dollar hedge fund, needs a bailout, because it has lost so much money shorting GME. They borrowed billions off another hedgefund.

That was yesterday. The stock price was $76.

Today, the stock ended up at $147.98 for every share. Up from $4.

These hedgefunds are STILL shorting the stock, at 130% of available shares.
That’s how fucking greedy these guys are.

All those millions of shares STILL have to be paid back. 

 And that’s where our story picks up.

Hedgefunds are crying on CNBC. on CNN. on FoxNews. On literally every every platform they can get their hands on. They want the government to stop trading. They want this reddit forum investigated and banned. They’re screaming “market manipulation”, when in reality these hedgefunds were the ones manipulating the stock, but they got caught, and are now trying to take their ball and go home.

Now, if you haven’t realized it yet:

With a normal investment, when buying stocks normally, the maximum you can lose is your original investment.

When short selling, your losses are theoretically infinite. Because you HAVE to buy back at whatever price is available.

So while these hedgefunds are on every news channel, every investing segment screaming about Reddit and Wallstreetbets, they inevitably draw attention to themselves, and what’s going on.

Enter the “whales”- individual investors who can make a splash and impact the stock. Millionaires and billionaires that have a bone to pick with hedgefunds and short sellers.

Elon Musk famously despises short sellers, because they tried to cripple Tesla so often. With a single tweet, Elon sent the share price skyrocketing from $147.98 to $230.

And along with Elon Musk, a huge number of wealthy “whales” have started to jump in. Buying up HUGE amounts of stock, at crazy prices.

But these investors don’t care. They don’t care how expensive they buy the stock for. Because they KNOW these hedgefunds MUST buy the shares back.

For many of them, they don’t actually care if they lose money. They just want to watch these hedgefunds burn.

Does this mean you should buy GME?

I’m not gonna answer this question, because you obviously shouldn’t be listening to strangers on the internet when it comes to your money.

There’s a lot of upside to buying GME, but there’s also a crazy amount of downside.
Tomorrow the share could go back to $4 and you could lose everything.
These shares are obscenely overvalued, and the only reason they keep going up is that people are gambling that the hedgefunds will buy them for a higher price (they likely will, but up until what point?).

It’s a game of chicken.

When the game ends, the house of cards will crumble, and people will lose millions. 

The only thing I can recommend is that you grab a beer, and keep an eye on GME and enjoy the fireworks.

– AoShin, here 

Delicious!

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