GameStop Stock Frenzy: Unveiling the Dark Side of Retail Investors

Introduction: David vs. Goliath on Wall Street

In early 2021, a decentralzied movement of retail stock traders on Reddit brought iconic but declining retailer GameStop to the edge of financial oblivion. These self-styled "Apes" orchestrated an unprecedented short squeeze causing GameStop stock to rocket up over 1700% in weeks (1).

Many Apes became millionaires almost overnight. But behind this dramatic David vs. Goliath tale lies a problematic side: GameStop mania is perpetuated by conspiracy theories and addiction-like behaviors making believers vulnerable to manipulation. The disconnect from reality also poses risks for financial markets.

This analysis will highlight key forces driving this uncontrolled phenomenon – and why its leadership lacks accountability to stem blatant risks being embraced by retail investors.

The Power of Social Media Meets Short Selling

Context is crucial to understanding how GameStop stock spun out of control. For years, short sellers had been steadily building up positions betting that the struggling video game retailer would continue its descent as online marketplaces disrupted brick-and-mortar stores.

But in January 2021 the perfect storm arose. A group calling itself WallStreetBets (WSB) had formed on Reddit from retail stock traders wanting big risky profits. They devised a plan to orchestrate a monumental short squeeze on GameStop after noticing an inordinately high 122% of available shares were held by short sellers impatient to profit from the chain‘s demise (2).

WSB would ignite a buying frenzy that shot up share prices. This "short squeeze" dynamic forces short sellers still holding positions to buy stocks at inflated values to close out massive impending losses. Desperate covering of positions by short sellers can in turn shoot prices up astronomically.

And WSB proved masters at using social media to summon a massive wave of buyers. At critical moments they got Musk and Chamath onside to amplification effects. Conspiracy theories erupted when Robinhood halted meme stock purchases during price spikes, supercharging activist speculation that this revolution would permanently shake Wall Street‘s pillars.

The Cult of MOASS Emerges

The core driver of the persistent mania around GameStop stems from belief in the MOASS theory – the "Mother of All Short Squeezes". Apes are convinced GameStop stock is destined for another explosive price surge that will utterly dwarf the January 2021 mayhem.

The reasons given for the certainty of MOASS shift constantly in Telegram channels and Reddit forums. But influential variants argue illegal naked short selling has created millions of synthetic/counterfeit shares that will eventually unravel catastrophically to create forced buying at astronomical valuations (3). True MOASS believers describe a heroic last stand to destroy corrupt elements of the financial system through an unprecedented transfer of wealth.

Vague invocation of systemic illegality provides insulation from confronting hard facts. But concrete signs of impending MOASS never materialize while theories constantly mutate. Ultimately the foundational flaw underlying MOASS theory is the assumption that NYSE and clearing houses will catastrophically fail in ways that primarily benefit retail investors and traders. This appears more rooted in resentment than hard-nosed analysis.

And despite Apes declaringShort selling and naked short selling both allow the borrowing and sale of assets not owned by the sellers, but naked shorting circumvents rules requiring borrowed shares. Both practices can negatively impact companies shorted, but options exist to minimize harm. Reform rather than outright bans are gaining support.

For example, the SEC is implementing reporting rules to improve transparency around short selling and Failure-to-Deliver notices (when sold shares are not transferred to buyers). This data empowers analysis of potentially malicious practices (7). Other reforms like streamlining share recallvoting processes could also help balance matters.

Regardless, the response of retail traders hardly appears efficient or ethical. While fortunes were made, last January‘s surge relied overwhelmingly on masses of newbie FOMO buyers left destitute. And "strategy" still prioritizes harming institutions over fundamentals.

Consider how the Ape community responded when Ryan Cohen provoked a spike in Bed Bath and Beyond. As chairman, Cohen had built a sizable stake in the company, sparking speculation he would attempt a GameStop-style turnaround. Apes poured in based on hype once Cohen‘s intentions were revealed, shooting Bed Bath and Beyond up over 400% in weeks last August (8).

The familiar trajectory saw valuation untether from any reasonable expectation of performance. Cohen unexpectedly sold off his entire stake for an estimated $68 million profit just months later, tanking share price nearly 20% in a day (9).

Many cried insider trading, but no evidence supported this. The saga actually spotlights two recurring issues: manic bandwagon trading around celebrity retail investors, and leadership gaps with decentralized movements. Valuation for meme stocks frequently diverge from reality.

Social Media Chicanery: Shills, Bots, Influencers

Speculation surrounds Ryan Cohen‘s ongoing relationship with GameStop as well. He clearly supports visions of a blockchain/Web3/NFT pivot – but concrete plans remain lacking. Suspicion of frozen partnership talks with Loopring recently sparked waves of selling (10).

This exemplifies the volatility introduced by influencers and anonymous internet information. Retail discussions feature constant debate over various "DD" (due diligence) presentations making bold claims.

But quality varies wildly. Contributions get judged more on slick packaging than rigor. Critics face masses of trolls. Expert warnings about comprehending economic "basics" find little traction compared to tantalizing promises of impending MOASS. The disjointed process yields minimal accountability.

Misinformation also runs rampant. "Shilling" refers to bad actors promoting worthless or scammy stocks to unwitting retail traders. But in Ape circles virtually any negative view gets dismissed as paid propaganda. This emergent "FUD" culture fosters intense reality denial and conspiracy theories.

And then there is the explosion of monetization influences like gurus, affiliate marketers, and WeTube channels profiting directly from retail trading attention. Most care chiefly about viewership and cloak themselves in plausausible deniability. But zombie memes and fake images still proliferate across Twitter, Facebook, Instagram and TikTok (11).

This overstimulation breeds addiction-like engagement and solidifies concepts unrooted from reality. No matter how many warnings experts raise, meme stock communities cannot resist the siren song.

Perpetual Hype Cycles Feeding Addiction

Cult experts highlight how circular logic and ever-shifting promises allow groups to retain adherents even after years of failed prophecies (12). This perfectly summarizes the meme stock reality distortion field.

The repeated hype cycles also mimic addictive patterns. Periodic spikes promising the next huge payday give just enough positive feedback. This conditions adherents to downplay legitimate dangers and warning signs. Feelings of identity and community further reinforce willful belief distortion.

Celebrity retailer investors also exploit this phsychological vulnerability. Figures like Roaring Kitty and Ryan Cohen frequently issue cryptic tweets sending hordes of devotees scrambling to decipher their meaning regarding GameStop or other stocks. This trains engagement akin to pigeons pecking levers for food pellets.

The cycles even impact non-adherents. Witnessing early sprees returning 1000% gains WOFO (fear of missing out) festers, leading many to ultimately join the GameStop casino betting they can also time the rollercoaster. Of course most end up crushed, but the few winners get memorialized across social media and WeTube.

And with each spike a new generation gets exposed. Today stock trading dominates youth culture. Conferences like Bitcoin 2021 wow young attendees with exotic machines and luxury gifts awarded to top traders [(13)](https://decrypt.co/ resources/bitcoin-2021-conference-10-weirdest-things-we-saw-miami).

Platforms like Robinhood exploit the gamification appeal with marginal trading and aesthetics glorifying reckless speculation. Cryptocurrency debt-fueled leverage betting draws in huge youth crowds across Asia despite suicidal outcomes (14).

This inertia reveals the absence of accountability for problematic dynamics in retail trading. Ultimately human psychology remains highly vulnerable to schemes exploiting biases – something the decentralized meme stock movement cannot overcome without major reforms.

Until then the same afflictions will corrupt every generation‘s embrace of retail investing. Savvy institutions will happily profit from the manias as economic history repeats. And the promised MOASS paydays will always remain tantalizingly just around the corner.