Shares, crypto money, raw materials: this is how amateur gamers cause price explosions

Stocks, cryptocurrency, commodities
This is how amateur gamers cause price explosions

From Jan Gänger

Stock prices soar, hedge funds get into trouble, silver suddenly becomes more expensive. Traders meet up on the internet and mess up the stock market. explains how it works.

The stock exchanges are having a wild time. Suddenly the prices of individual stocks, silver or a digital currency started as a parody go through the roof. The question arises: What is actually going on?

A flash mob is going on. The principle is simple: Hobby traders meet up on the Internet in order, for example, to drive the price of a share up. The place with the greatest influence can be found on the Internet platform Reddit. Around 7.4 million users are now networked with one another in its "Wallstreetbets" forum. In the last few days it has impressively demonstrated how powerful the group is.

The first step: The horde must be convinced that as many as possible are pouncing on a target at the same time. If a sufficiently large amount joins forces and, for example, buys shares in a company, this can drive the price noticeably upwards – especially if more and more people participate in it due to the initial success. It helps the Reddit gamers that they stage their speculations as a fight of good against evil.

In this way, theoretically, the price of any stock can be driven up at times. The group increases its clout when it relies on very special stocks: papers on which hedge funds bet on falling prices. The goal is to force these powerful speculators to buy these very stocks en masse – and thereby drive the price up further. In stock market jargon, this weapon is called a "short squeeze".

Silver in sight

It works like this: Many financial institutions bet that the price of a stock will fall. They do this through so-called short sales. To do this, they borrow securities for a fee and then sell them. If the price drops by the return date, you can stock up on the titles cheaper and make the difference as a profit. There's also the uncovered short sales where they don't even borrow the paper they sell. At the video game retailer Gamestop, this resulted in more stocks being sold short than there are at all.

The Reddit Army is taking advantage of this. Because if the share price rises, the bet goes wrong. And the higher it is on the agreed return date, the more expensive it will be for professional speculators. If the price soars, a point is quickly reached at which the short sellers buy shares in order to at least limit their losses. In doing so, they ensure that the price continues to rise – and force other short sellers to follow suit. If investors dissolve their bets on falling prices on a large scale, the "short squeeze" has occurred and the hobby gamblers sell their papers at a profit.

The hedge fund Melvin Capital, which had bet on a price slide at Gamestop, burned a lot of money. In January, according to Reuters, he lost around $ 6 billion, more than half of his assets under management. Only a multi-billion dollar injection from two partner hedge funds saved Melvin Capital.

The Reddit horde and their comrades-in-arms are currently trying to use the "short squeeze" method with a much larger caliber: silver. However, it is questionable whether this will be successful. For one thing, the market is much larger; silver is one of the most heavily traded precious metals in the world. On the other hand, it looks like hedge funds are betting on a rising rather than a falling silver price.