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How Social Media Revolutionized Investing: WallStreetBets, GameStop and Melvin Capital

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Introduction

2021 was the year David beat Goliath, as a financial frenzy took the world by storm as an online army of retail investors on a Reddit group called WallStreetBets (WSB) took on powerful and established institutions on Wall Street — and won. This is the story of WallStreetBets and Melvin Capital, and how GameStop stocks almost destroyed Wall Street, and forever turned the tables on traditional finance and social media.

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WallStreetBets

WallStreetBets is a Reddit group that was created in 2012, and quickly became known for its meme centered discussions about trading and investing in the stock market. What began as a disassociated, irreverent subreddit group over time morphed into a powerhouse of market democratization and almost became a type of hive-mind investing channel. WSB has historically focused more on high-risk, high-reward strategies, and it grew exponentially in popularity during the COVID-19 pandemic as more people turned to day trading while stuck at home.

The GameStop Short Squeeze

In late 2020 through to early 2021, GameStop (GME), a struggling video game retailer, was among the most heavily shorted stocks on the market. Short selling is a strategy where investors bet against a stock’s performance, borrowing shares to sell with the expectation that the stock’s price will decline, later buying back shares at a lower price, returning them to the lender and profiting from the difference.

Melvin Capital, a Wall Street hedge fund, was one of many institutions heavily shorting GameStop. Some investors on WSB saw this as their opportunity to “squeeze” the shorts and drive the stock’s price higher. They believed that if they collectively bought enough shares of GameStop, they could force the short sellers to cover their positions, resulting in a rapid surge in the stock price. This had never happened before on a large scale, and it worked.

The Power of Social Media and Retail Investors

The GameStop short squeeze became a rallying cry for individual investors who felt that the stock market was rigged in favor of powerful institutions. Social media, particularly the WallStreetBets subreddit, played a pivotal role in mobilizing a large swathes of retail investors with one goal: to take on Wall Street and make a statement against perceived market manipulation.

The hive-mind mentality led to a staggering spike in GME’s stock price, from single digits to over $300 per share, causing substantial losses for hedge funds and other investors who were shorting the stock.

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The Aftermath

The more WSB squeezed GameStop, the more WallStreet’s situation became dire. Some brokerage platforms, fearing potential liquidity issues, restricted trading of GME and other highly volatile stocks, further fueling the controversy. This decision was met with outrage from retail investors and politicians from both sides of the aisle, who criticized the perceived interference in the free market.

In the end, Melvin Capital and other hedge funds heavily shorting GameStop suffered substantial losses — in some cases billions of dollars, becoming a cautionary tale for professional investors who underestimated the power of united retail investors, social media, and the dynamics of a short squeeze.

Regulatory and Market Impact

This unprecedented historical event sparked widespread debate on market regulations, investor protections, and the role of social media in financial markets. Some argued that WSB’s collective action bordered on market manipulation, while others praised the democratization of finance and the newfound power of individual investors.

Conclusion

This historically impactful event showcased the power of social media to disrupt traditional financial markets, while highlighting the growing influence of retail investors. Whether this event will fundamentally change the landscape of Wall Street is yet to be seen, but one thing is for sure: the WSB saga has empowered and emboldened retail investors, and is not something Wall Street is likely to soon forget.

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