David Azzato is an angel investor, entrepreneur, and trades in Blockchain and Cryptocurrencies. His advice is based on his real-world experience and recently he took a look at what happened to the famous GameStop trading frenzy.
GameStop is a chain of retail stores that have for several years sold used games and video game equipment. These little shops that were in strip malls around America also took trade-ins on games and equipment, which is what led to their cult-like following. Later on, they expanded into collectibles, clothing, and other game-related gear. However, they had some financial woes and saw their overall value decline, including their stock market price. This is where David Azzato looks at the rise and fall of the GameStop stock value.
Azzato analyzed the GameStop trading frenzy and saw that the small-time investor can have tremendous influence over the larger market. He discusses how a small Reddit forum, now infamous, called r/WallStreetBets was able to gain enough traction and influence to make Wall St. second guess their trading rules. Azzato explains that this small group of day traders thought that Gamestop stock was actually much more valuable than what it was currently valued on the stock exchange. So those investors started trading the stock and the value began to increase.
As David Azzato explains, none of this would have been a big deal except for various fund managers who were trying to short the stock. Azzato explains that the idea behind shorting a stock is that you assume the price will go down. While this is a perfectly legitimate way to make money on Wall St., the hedge fund managers ran into a problem. Hedge fund managers as Azzato explains, don’t own the stock but borrow it from brokerage firms. The intention is to sell the stock at its peak price and buy it back at the low range, then return it to the broker. The profit is the difference between what you sold it for and what price you were able to buy it back. However, because daytraders were inflating the stock price of Gamestop, the fund managers were stuck with the Gamestop stocks. They couldn’t buy it back at an affordable price and since they didn’t own the stock they were on the hook for the price, either through collateral or paying out. A scenario not many could afford.
David Azzato doesn’t believe that this kind of scenario is likely to occur again in the exact same manner, but doesn’t take it all off the table. Since Reddit still exists and people are still actively involved in day trading, it’s possible that we will see these stock fluctuations again, just not this dramatic. Azzato pointed out some significant changes that may occur, including how trading is regulated. Robinhood decided just to shut trading down, which was met with a lot of complaining and arguments about unfair trading practices. Wall St and those trying to short stocks will forever have to look over their shoulders to see who might be trading the same stock. In the end, Azzato concludes that while this sort of frenzy isn’t likely to happen again, the die has been cast and Wall St and day trading will never be the same.