Note: None of this is investment advice, do your own due diligence.
Some scattered thoughts on the $GME situation:
1) A real life robinhood story is entertaining, which explains why this situation has captured so much attention
2) Melvin vs r/WSB doesn’t exist in a bubble. Hedge funds are in competition with each other, it is a stretch to think that another fund didn’t notice an overload of shorts but some disorganized memeing redditors did
3) It’s by extension even more improbable to think that the memeing redditors were able to coordinate and act quickly enough without tipping off hedge funds / hfts
4) A lot of the technicals being spread around about the situation are plain false, which reveals a lot of people are just parroting instead of knowing what their actually doing
5) As the situation grows more mainstream, more people buy in due to meme / FOMO / being enchanted by the narrative.
6) WSB consensus seems split between “sell high after friday spike”, and “hold long, gamestock is viable”. The former is just gambling, hoping their sell order goes through at the right price, the later is just disillusion.
7) The later you bought the stocks, the more you have to lose. That means mainstream > influencers > internet savy / twitter > reddit > early investors / wall street in terms of risk. Each tier depends on the next to not want to miss out and buy the stocks.
8) Going back to 6), what is the exit strategy of most of the r/WSB crowd? What is preventing a race to the bottom where everyone thinks “let me sell before the crash?”. Selling high is hard, especially in pure speculation.
If you made money, I am happy for you, but please try to cash out at least some of the earnings before the crash. I know the comradeship of “diamond hands” is romantic, but try to protect yourself before you get burned. Don’t think that group support will last when things go sour.
I think you are treating this too much like a normal trade situation; my impression is that the whole thing is mostly driven by people wanting to stick it to hedge funds. They "spent" some money on the good fun and have written off the amount.
Supposing that r/WSB is actually responsible (in part) for spiking $GME (do they really make up enough volume?), I find it fascinating how they're resolving coordination problems and creating common knowledge.
One post last night was titled something like "upvote if you aren't selling before ($1000/$5000/some number I forget)!". At first this seemed like classic Reddit karma-whoring / circle-jerking, but then I realized that this actually creates some degree of common knowledge: by upvoting, you weakly signal support to others - and to yourself via consistency pressure - that you won't defect by selling early. And they know you know ..., because you've all seen and upvoted the same post. You know this is true for many people, because there are so many upvotes.
There's the diamond / paper hands dichotomy, honoring cooperators and looking down on defectors. There's the "IF HE'S IN I'M IN" meme going on with one of the original traders, u/DeepFuckingValue, expressing the sentiment that given u/DFV's (apparent) multi-million ongoing stake in $GME, the other users will follow their lead by not selling.
I'm sure there's other things I've missed. But this was one of my first thoughts when I learned about this hilarious situation.
They can profit without this sort of Ponzi scheme. The best analogy I have seen is as follows:
Suppose you have 5 phones on the market, and by law short sellers have to buy 10 phones. Since the demand will always be higher than supply ( the legal requirement forces short sellers to buy ), then the price will go off to infinity by natural supply/demand mechanics.
The only way to break this is by increasing supply, ie if long stock holders decide to sell they shares as you recommended when you say get out. This would not be maximally beneficial for the long holders. Once supply surpasses demand the overpricing immediately breaks, but that doesn’t need to happen. Since short sellers owe something like 120% of the stock ( I’m not sure of the exact value), long holders could theoretically agree to sell only 1% of their stock each at a million a share, and this would still work and benefit all long holders.
This was only possible because short sellers overbought their side. The interesting issue here is that even though there is a way for ALL long holders to profit immensely, it would fail if enough of them get scared into selling, so it becomes a real life coordination problem. Do you think they can pull it off?
PS: I’ve worked in finance and found this very interesting, both due to the unusual short squeeze it is, and to the behavioural side of the situation. I’d like to hear opposing thoughts and questions if my writing isn’t as clear as it should be. Exciting times!
Can you go into more detail for #4?