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Who will end up crying out when the GameStop bubble bursts?

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Small investors who had been trapped at home in the wake of the pandemic were the ones that fueled the growth of GameStop shares. And it will be they, and not Wall Street agents, who will end up cry out when the bubble they have created bursts, several analysts warn.

During 2020, trading platforms that do not charge commissions for their services – such as Robinhood – have attracted the interest of many people who wanted to access investment markets to obtain quick income. After lowering the bar, retail investors could trade, stockbrokers became the factor that ended up inflating the GameStop bubble, Ronnie Sadka, a professor of finance at Boston College, told Reuters.

Who is at risk?

As a result, GameStop shares surpassed $ 300 and pushed some people to invest more money in the company, whose real value – according to Wall Street analysts polled by Refinitiv – is just over $ 13 per share

This rally increases the risk that smaller investors will get carried away by euphoria and ignore warnings about the consequences of a possible drop. 

According to Sadka, ordinary people who are investing are becoming “a systemic risk” that the US Securities and Exchange Commission is not ready to handle.

“The challenge with regulation is that this is not a case where Wall Street is squeezing the mom and pops, this is a case where the short-sellers are getting squeezed,” the analyst said.

Short selling occurs when an investor sells shares loaned by a broker to purchase identical assets at a later date in the hope of making a financial profit. The strategy is risky since the price of an asset can grow unexpectedly, as happened with GameStop. What happened with the video game sales chain was a nightmare for the hedge funds that bet on its collapse.

However, a rather different scenario is very likely in the future. In this case, those who invest in GameStop will be the ones who will burn the most, warns Michael Pachter, an analyst at the private investment firm Wedbush Securities.

“This is the tulip bubble all over again,” he emphasized. 

In this way, the expert referred to a period of speculative euphoria in the Netherlands that took place in the years before 1637 during an outbreak of bubonic plague. In history, it was called tulipomania or tulip mania, and it ended up forming a bubble that exploded on February 5, 1637. That crisis showed that the price of an asset can plummet as quickly as it shoots. The scene ends up being bleak. 

Some of those who invested in GameStop doesn’t “even know what GameStop sells,” Pachter noted, recalling how he received a call from a friend who bragged about putting $ 1,000 on Reddit favorites like GameStop, AMC and BlackBerry and in two weeks entered about $ 400,000. 

The myth about Wall Street 

Indeed, the GameStop case represents a form of class war that small investors are waging against hedge fund managers, who bet that the store’s shares would fall, highlights the agency.

It’s different from the fads that rocked markets in the past, like the 2000 dot-com bubble or the real estate crisis that culminated in the financial crisis of 2008. However, for those who buy GameStop at the wrong time, the results are likely to be the same.

Today the total value of short positions favored by Reddit users, as in the case of GameStop, is about $ 40 billion. This implies that its possible collapse would harm only a handful of hedge funds, according to analysts at British bank Barclays.

“The reality is that GameStop doesn’t hurt Wall Street. It might hurt a couple of hedge fund managers out there, but no one is going to cry for them. The people who will be losing their life savings are small retail investors,” said Ben Inker, one of the executives of the GMO company.

That scenario worries many analysts, including those on Wall Street, while GameStop’s prices rose again on January 30 after the investment app Robinhood retracted its strategy by allowing the limited purchase of assets.

“GameStop is not worth $500, not worth $400, not worth $300, not worth $200, not even worth $100, not even worth $50,” warned billionaire investor Leon Cooperman in a conversation with the US network CNBC.

In March 2000, the dot-com bubble reached its peak when the Nasdaq index – which brings together companies of great technological weight – rose 400%. Two years later it plummeted more than 75%. It destroyed some 6.2 trillion dollars worth of homes, estimated University of Chicago professor Amir Sufi. 

In turn, the 2008 financial crisis took nearly $ 16.4 trillion from Americans through a combination of sharp losses in the stock market and falling home values, the Federal Reserve calculated. 

Now no one expects the GameStop bubble to cause anything like the same levels of financial pain. And it’s partly because the company has issued a negligible number of shares and was not very popular with institutional investors before the year began. 

With $ 6.5 billion in revenue in its last fiscal year and fewer than 53,000 employees worldwide, GameStop is not capable of causing a massive financial impact. But its collapse has them all to hurt those who helped turn Wall Street’s notion of what individual investors can do, writes Reuters.

“There’s going to be some blood on the floor when this is all over, but that’s going to be some hedge fund blood and a lot of retail blood,” warned Donald Langevoort, Georgetown law professor and specialist in securities regulation.

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