Reddit’s r/Wallstreetbets is beating hedge funds at their own game.
Crypto exchange FTX has listed GameStop, a global video game retail chain, after the stock became by far the most popular choice on Reddit’s infamous r/Wallstreetbets, a community dedicated to trading stock market options.
The FTX listing on Wednesday morning allows crypto traders to get in on the action as well. The offering comes as part of FTX’s tokenized stocks program, which features both spot and futures markets for popular stocks and indices. This allows crypto traders to get exposure to stocks using crypto and stablecoins, in addition to fiat options.
GameStop's stock, trading under the ticker GME, has generated massive media attention after a dramatic rally has resulted in more than tenfold gains since Jan. 12.
The rally is largely attributed to r/Wallstreetbets, a subreddit for stock market traders. GameStop has long been one of the favorites of the community, though it shared the spotlight with other high growth stocks like Tesla or Nio.
GameStop itself has been in rough financial shape for a long time, as digital video game delivery has steadily eroded its brick-and-mortar business in the past few years. The COVID-19 closures further depressed the company’s prospects.
These factors likely contributed to Melvin Capital Management’s decision to enter a short position in the stock, betting that its price would go down. Unfortunately for the company, someone at r/Wallstreetbets discovered this short position due to mandatory disclosures with the United States Securities and Exchange Commission.
The subreddit then rallied behind the stock in a concerted effort to squeeze the short out — to force the price to go up so much that the short position must be liquidated. After GME topped out at $320 in pre-market trading, it appears the Redditors were successful in their mission, as the hedge fund announced it closed its position.
The unfortunate trade reportedly caused a $3.75-billion loss for the fund since the start of 2021, amounting to more than 30% of its capital. Other hedge funds “bailed out” Melvin Capital Management with a $2.75 billion investment. Still, some details of the story remain unclear. For example, the initial short position discovered by Redditors was just $55 million in put options. The losses from buying options are limited to 100% of their value, which could suggest that other positions had a strong contribution to the supposed multibillion-dollar loss.
The story has a very similar analog within the crypto space. In the summer of 2020, the Chainlink community rallied against an announced short position opened by a company named Zeus Capital. The details of that event led many to question the true motives of announcing the supposed short position.
As of writing, GME has fallen by over 33% since being listed on FTX.