The GameStop pump may create a path for a number of investors to finally get round to learning about DeFi and the advantages it has.
What happened to GameStop’s stock (being shorted by hedge funds) in January will always be remembered by investors forever. It was probably the first time ever in the so called “free market” that a reddit group of self-described internet “degenerates” outsmarted the big boys at Wall street at their own game, causing many hedge funds to suffer.
On January 27, when the Dow Jones Industrial Average fell dramatically by over 2% due to the United States Federal Reserve announcing its intention to maintain interest rates around the 0% mark, shares of video games retailer called GameStop (GME) and movie theatre chain called AMC Entertainment (AMC) went on to rise by 130% and 300%, taking their market capitalizations to £17 billion and £4.91 billion.
This surge in the companies capitalizations was orchestrated by a group of small time traders operating out of a Reddit subreddit group called r/Wallstreetbets. They were able to recognize that key traders over at the New York based hedge fund called Melvin Capital were shorting GameStop shares in order to get massive profits for themselves.
Basically, “shorting” is a practice used by stock market traders where an individual borrows shares from their brokers etc only to sell them off immediately hoping of buying them back once the price of the shares drop. The individuals would then return these shares to the lender, gaining from the difference between the price at the time of borrowing & the returning of the stock.
With the group noticing this was happening on a regular basis, a large number of Redditors go together and started to pump GME and AMC stocks, among some other stocks too. This resulted in the price shooting up by over 2,000% in a matter of days. This caused Melvin Capital to lose a crazy amount of money costing them billions as they were not able to buy the stocks back cheaper and had to purchase them at a higher price.
Financial services providers such as Robinhood and TD Ameritrade decided to help Wall Street cut down on its losses by restricting the purchase of these stocks. Initially, an individual was only to purchase 1 share, then as time went on they allowed up to 100 shares to be purchased. Slowing down any effect the Reddit groups had on the hedge funds and short traders who were losing badly.
With a lot of people questioning Robothoods actions by restricting users access to buy shares, something didn’t sit quite right with them, since it’s supposed to be a free market and not controlled or manipulated by these platforms.
With more people being introduced to a decentralised world, many traders were then introduced to DeFi which aims to be a decentralised platform that is not controlled by such companies.
Investors are starting to realise that a decentralised solution is very much needed to allow the free trades to continue without being blocked out.
Could this mean there’s going to be a burst of DeFi investors and what’s this situation going to evolve into?
Let us know know what you think on our social media accounts above.