Hedge funds have lost billions of dollars to amateur investors at the start of the year.
However, inexperienced hobbyist investors have also lost a large chunk of their savings in this process.
Constant misinformation and manipulation could compromise the integrity of markets, including the emerging cryptocurrency asset class.
The Trust Project is an international consortium of news organizations based on transparency standards.
With the GameStop scandal over, amateur investors should now be thinking about a new approach.
This turbulent start to the year is already proof of an upsurge in amateur investors seeking to earn money on stocks and various other assets such as cryptocurrency. Although this led to a transfer of wealth , many were also victims of this process.
With the democratization of financial market information and the power of platforms like Bitcoin Up and Twitter, every voice now has a platform. However, these voices can be malicious or motivated by questionable intentions – all while being disguised and acting harmlessly. Most of the time, authors have no regard for the social status of their targets.
The Virgin Market Maker vs. The Chad “The Kid”: Reddit
Amateur investors with little exposure to financial markets are often the victims of such misinformation. Many eventually lose their savings and confidence in the markets, never coming back to try again. For some evidence of how small investors are being manipulated, take a look at the recent manipulation involving GameStop .
A short position involves investors betting against a stock by selling it preemptively and later buying it at a lower price. If the price increases, however, the investor is forced to buy at the price dictated by the market. Additionally, if there is no supply of stocks in that market, demand can cause prices to skyrocket. This is known as a short squeeze, or “short squeeze” in English.
The manipulation of retail traders in the GameStop affair
In early January 2020, a small group of users in Reddit’s WallStreetBets (WSB) community discovered that GameStop stocks had fallen victim to short positions. The video game company has seen its prospects wane in the face of the pandemic and changing consumer behavior. This motivated several hedge funds and institutional investors to take short positions on GameStop.
Historically, the short positions of these companies have been a risky game, but generally profitable. In this case, 140% of the shares of the company had been sold short. This figure meant that GameStop had become Wall Street’s best-selling short-selling stock.
Reddit’s WallStreetBets community was quick to point out that the situation was ideal for taking action. In the first few weeks of 2021, users of the discussion board began purchasing all of the available shares of GameStop. As the redemption date for short positions approached, GameStop’s price began to climb.