The “GameStop Situation” for Dummies
What is actually happening with Gamestop? And does it affect me as a gamer?
If you have been online at all over the last week, you may have seen a lot of articles, news-bites and memes referring to GameStop, Wall Street and Reddit. This all seems quite out of the blue, confusing and otherworldly to us regular Joe and Jane Schmoes. Well, have no fear! Thanks to some online forums, there have been a few breakdowns and guides as to what happened and how it all worked. Today I’m going to try to make it a little easier for us all to understand and, most importantly, what impact it may have on us gamers.
It’s important to note that none of us here on the deMars team are experts in economics. In creating this article, we refer to several online sources that we believed made it easier to understand, which will be linked below. We are not financial advisors and we urge you all to learn about the potential risks to investing in stock shares like this before committing your hard-earned cash.
So what actually happened?
In the briefest way possible, some very wealthy investors recognised that GameStop were struggling financially. This was a trend even before the pandemic. The shop that sells new and pre-owned games, as well as many other pop culture merchandise, had been losing a lot of business thanks to digital avenues for purchasing games. The pandemic also didn’t help, like it hasn’t helped many businesses, meaning investors were all but certain that the chain would collapse and eventually shut down.
To the ultra-rich investors, they saw an opportunity to make even more money by doing something called short-selling. An in-depth analysis on short-selling can be found here, but for us laypeople, here’s an easy way to define it:
Let’s say Paul(That’s me) knows that games will decrease in price soon. So Paul borrows the new Hitman 3 game worth €50 from Colin and promises to give it back before the end of the week. Paul then immediately sells that game to Ana for the same price. In the time that Ana has that copy of Hitman 3, the price of the game goes down to €25. Now Paul buys back the game from Ana for €25 and gives the game back to Colin by week’s end. Now Colin has his copy of Hitman 3 back and Paul has €25 in his pocket (I wish…).
That is an extremely basic understanding that omits a lot of big details, such as being able to short more stock than is actually available, hedge funds and more, but it’s a starting point. Basically, it’s making a well-educated bet in favour of someone losing or going out of business. Seems monstrous right? Well, it’s been happening for years and no legal repercussions have ever been met by those responsible due to completely legal loopholes. A very famous application of this strategy happened during the housing market crash in 2008, which is portrayed brilliantly in the 2015 film The Big Short, directed by Adam McKay.
This film is available on Netflix Ireland right now, and I cannot recommend it enough.
Unfortunately for investors who shorted GameStop, their financial actions became public information. In fact, almost every investment that happens in a publicly-traded company becomes public information. Some very intelligent and lucky Redditors on r/WallStreetBets saw what was happening and decided to invest in favour of GameStop. It was a bit of a meme, but ultimately they wanted to play the billionaire investors at their own game. While the investors wanted to make money off of average people losing money, these Redditors wanted to make money by causing billionaire investors to lose money.
Let’s apply this to our example earlier:
Say people now invested in Hitman 3, the game Paul borrowed from Colin. The price of Colin’s game has now increased after we borrowed it and sold it to Ana, which is the opposite of what Paul wanted to happen. Paul needs to return the game back to Colin by the weekend, but by the time the weekend comes, the game is now worth €75 now (Remember, Paul sold it for €50). So Paul is forced to buy the game back from Ana for €75 and give the game back to Colin. Now Paul has lost €25 (Sounds about right).
Does this affect me and my games?
The short answer is, no.
You will more than likely see no difference in pricing or access to video-games. Since GameStop is a distributor, rather than a publisher, so they wouldn’t have too much of a say on game pricing. And since they don’t want to lose any further business, they will maintain prices at a competitive level.
Unless you have stock in GameStop, or if you shorted the company, then it is highly unlikely that you will be affected by this. The unfortunate truth is that not many people were buying games from GameStop, with more and more people buying their games digitally. This may mean, however, that GameStop won’t disappear in the near future. Higher stock prices have been shown to give confidence to consumers and businesses, leading to a better outcome for the company. (See here)
It’s very possible that we may see GameStop use this boost as a way to innovate their shops, or perhaps they can retire with a bit more of a nest egg than they were expecting. If the former is true, maybe gamers will see better ways to purchase and trade games in the near future.
You may want to keep an eye on what millionaire investors may say about this. There have been some rumblings about changing access requirements to the market due to their loss in funds, but that’s a whole other topic for another time.
Meanwhile, on Reddit and across the internet, people are using this as an opportunity to make a laughing stock out of the ultra-rich. Those who invested could easily sell right now and turn their $300 investment into millions… But they’re not.
Those who invested in favour of GameStop realise that if they all sell out now, GameStop’s stock price will fall again, meaning the billionaire hedge funders will either still come out profitable or suffer a lesser loss than they would. User “u/DeepF@#$ingValue” (without the censorship), along with other Reddit investors have been dubbed “Diamond Hands” for the sole reason that they could become millionaires by selling, but they are refusing to do so. They just keep holding and holding. In fact, many followers of the above-named user have been saying in almost every thread “If he’s still in, I’m still in!”
For now, there has been some huge support from a lot of celebrities and online personalities, from Elon Musk to Ethan Klein, Ted Cruz to Alexandria Ocasio-Cortez. There’s a lot of discussions ongoing.
On a personal note, it’s always tough seeing these shops shutting their doors, so I’m delighted that GameStop can stay afloat, at least for another little while. Next time you’re thinking of picking up a game, consider getting one from a local video game shop, rather than online.
Who knows how long the Reddit investors will keep holding?
It’s up to the “Diamond Hands” now.
To the Moon!