What happened at GameStop and why it affects you
Every now and then, something comes along that shakes finance to the core. Normally it’s a market bubble or a financial crisis. This time it’s a group of ordinary internet users with an interest in finance, many of whom were first-time investors, that decided to take down the titans of Wall Street.
Through the power of the internet and a scalding rage against the power of mainstream finance, ordinary investors forced one company’s stock up over 800%, undermining the industry’s biggest players in a way never seen before.
Until last week, Gamestop was just a multinational company that struggled to sell games and merchandise. It had already closed 783 stores in the past two years and its stock was trading for as little as $3.50 in March 2020. And then the pandemic happened.
Hedge funds bet that Gamestop shares would fall even further. To do this, investors borrow shares in a company and sell them, promising to pay them back at a later date. If the company loses value, these investors make a profit when they buy the share back after the price has fallen. This is called shorting.
Hedge funds managers have a huge influence over the markets. They can decide the fate of companies, just to suit their own profits. And most of the time this is exactly what happens.
But not this time.
A community on Reddit called WallStreetBets decided that the fat cats of the financial world shouldn’t be able to tweak the rules at the expense of everyone else. For them, it showed that finance is a game where the players with the biggest wallets decide who wins.
When people on Reddit realized mainstream financial companies were shorting GameStop, they realized they could do something about it.
Shorting requires stock prices to fall. So huge numbers of people organised on Reddit and rushed to buy GameStop stock. Prices shot through the roof. Demand outstripped supply and everyone who had bet big on the prices dropping had to buy their shares back at a loss.
Normally those who play with the white hot heat of major-league finance get burned. This time it’s the one-percenters that were left nursing their wounds. Some major funds teetered on the edge of bankruptcy and had to borrow billions just to stay afloat. Others were forced to buy more stock to cover their losses, something that is called a short squeeze. But this just forced prices even higher.
But that wasn’t all.
As the scale of the losses by the financial institutions became apparent, the billionaires started bending the rules to try and stay rich. Trading platforms began to block people from their right to buy and sell stocks. Others said GameStop stock could only be sold and in an attempt to limit the price rising even more.
But the momentum among internet investors had already grown too great. Accusations of cronyism flew and CEOs and managers had to backtrack. Most trading restrictions were lifted and people once again got their way.
Ordinary people had played the financial elite at their own game and won.
So GameStop lives. What does this mean for everyone else?
Things like this don’t normally happen in mainstream finance. The Gamestop saga is not only a victory over the financial elite. It is also a powerful message that shows, through the power of the internet, people can come together and create new financial ecosystems that serve everyone, not just those at the top.
The GameStop activists took an old concern, that mainstream financial is rigged to benefit itself, and showed a community of like-minded people can change the realms of financial possibility. The solution: Decentralized finance.
Decentralized finance, known as DeFi, is a revolutionary financial ecosystem in which the most important services such as lending, trading and payments run on a blockchain. The most amazing thing is that this whole system is run by the community, without a hedge fund manager in sight.
Mainstream finance is an old-school members club that doesn’t like change. That couldn’t be further from the truth in DeFi. Decentralized finance is permissionless and open source. This means that anyone with coding skills or the will to learn them can contribute software to help make money smarter and more beneficial for everyone.
The dawn of the internet age showed that, when given the chance to show their ingenuity, people will seize the opportunity to create wealth and opportunities. For too long, the financial world has been closely guarded by those that know how fragile the current system is.
Most people assume that the financial world is closed to them. Until now that might have been true. But DeFi is the ultimate equalizer. No longer will you need an expensive business degree, old-money connections and a $3,000 suit. All you need to take part in the DeFi revolution is a smartphone, an internet connection and the desire to change finance forever.
As more people realise the limitless potential for decentralisation to redefine finance, funding in the sector is growing at a blistering pace. But the sector is still young and early movers stand to benefit. That’s why our mission is to allow people to enter the world of sustainable wealth creation. Bitwala is bridging the gap to make these steps possible. Your role as a DeFi trailblazer starts here.