GameStop, Musk, and the threat to decentralization

Welcome to the revolution.

One of my favourite phrases from Gabriel García Márquez can be found in The Autumn of the Patriarch, and reads:

“El día que la mierda tenga algún valor, los pobres nacerán sin culo.” (The day shit has any value, the poor will be born without an ass”.

I was reminded about this during the recent shenanigans involving Reddit, Elon Musk, and several stocks such as GameStop. While I’m sure that those reading this blog post are more than familiar with this incident, let me recap to provide some background.

Recent years have seen the rise of “amateur” small investors interested in trading in the stock market, particularly using low commission and no-commission apps such as Robinhood. These are often younger first-time investors, who also join groups and follow YouTube and TikTok influencers who share tips and trading advice. This trend has been on the rise particularly due to the pandemic, more people at home with too much time. This is a positive aspect of the Internet, getting people together for advice, and while one could be suspicious of some of the recommendations given by people who have no qualifications, I’m one of those who think that people should be free to find their way around these forums mostly on their own. Decentralization at work!

One such influencer is YouTuber Keith Gill (aka RoaringKitty), who has accrued a substantial following by recommending stocks to his audience. Last year he started being bullish about what he considered to be an under-priced stock in the game retailer GameStop. Companies like GameStop have been having a difficult time because games are moving away from selling physical copies and going into fully digital downloads, which has also affected their share price. But GameStop retains a special place in the heart of many of the new investors, there is a non-negligible intersection between the amateur traders and the gamer demographic: mid-20s to early 30s, always online, meme-centric. So, influencers started pushing hard for a resurgence in the GameStop stock, an increase in price that had little to do with the fundamentals of the company. While some made the argument that GameStop could change its business model to accommodate trends, there is little to indicate that it could do so successfully, but others disagreed.

Here it is important to separate the genuinely interested small investors with another phenomenon that is often confused with it, and it is the Stonks meme. While many first-time investors tend to do their research and invest responsibly, Stonks are a more chaotic version. While it started as a joke about bad financial decisions, the meme became almost like a badge of honour in the months preceding the GameStop bubble. The idea is almost about ironic investing, the health of a company is irrelevant as long as it produces some meme-worthy content.

So GameStop started gaining traction both with serious small investors, and with the Stonks crowd (which are sometimes meeting in the same gathering spaces). The main driver of the stock became a sub-reddit called wallstreetbets., where users had been advocating for the stock for over a year. The constant push from influencers had an effect, and the price started to rise. At that point an interesting thing happened; redditors realised that Wall Street hedge funds were betting heavily against GameStop by shorting the stock. An idea started to emerge, to push up the price so that hedge funds would lose money. A lot of the threads discussing GameStop are now missing, but this screen-shot is indicative of the mood in the sub-reddit:

And thus a revolution was born. The price started to go up steadily as more people bought into the idea that hurting hedge funds was fun. A David vs Goliath narrative soon took over, Reddit vs Wall Street, and the Internet always wins. The price took off, and all we got in the news was how this changed everything, small investors could win against the billionaires. The “globalist elites” can’t compete against the net-savvy masses. As far as narratives go, it is a very  appealing one. We would like to think that the power of the decentralized Internet can achieve great things, and it is precisely designed for virality. It was only a matter of time until a stock went viral.

But while compelling, the narrative is wrong, the stock gained momentum thanks in great part to powerful centralized forces.

Enter Elon Musk, Shitposter in Chief.

Gamestonk!! https://t.co/RZtkDzAewJ

— Elon Musk (@elonmusk) January 26, 2021

I used to like Elon Musk. While I found Tesla to be the plaything of the type of person I strongly dislike, there was no doubt that it was pushing forwards the widespread adoption and acceptance of electric vehicles. I also thought that SpaceX was cool, and it was definitely headed in the right direction. I also found his carefree attitude towards copyright and patents to be refreshing. But at some point something changed, or maybe it was always there, and I just had not noticed. There was Starlink, a dubious vanity project that could end up affecting optical astronomy forever. There was the defamation suit arising from his useless attempt at rescuing the trapped children in Thailand. But perhaps most importantly, there is growing evidence that Musk is misusing his vast wealth, and is mostly now playing the character of an Internet troll delighting in his constant baiting of mainstream media, wielding his vast resources carelessly. With great power comes great responsibility, and Musk has been irresponsible with his.

For someone who can send stocks soaring or crashing, Musk has been busy giving away a very different image. He’s clearly very well versed in Internet lingo, he’s fluent in meme, he smokes joints with Joe Rogan, he talks authoritatively about the latest games and Twitch trends, and therefore has managed to connect directly to the all important gamer/Rogan demographic, the same one who helped elect Donald Trump.

So Musk has managed something quite amazing. The billionaire inheritor of a vast fortune has become a man of the downtrodden online masses; providing rockets, electric cars, bullet-proof trucks, memes, and flamethrowers to an adoring audience of nerds who will probably never get to consume anything other than the memes. He’s a billionaire, but smokes fat joints, has a cool young wife, and is trolling the normies. It’s amazing just how Musk gets away with this disparity between the reality of his fortune and privilege, and how he can connect with his online nerd audience. Here he is bemoaning that gamer darling communication app Discord has gone all mainstream and corporate, you really can’t make this stuff up. Musk complaining about a company going all corporate is like rich Brexiters complaining about the urban elites.

This is why Musk’s intervention in GameStop is so important. As mentioned earlier, GameStop had been gaining some momentum and going up thanks to the interest of redditors and small investors, in particular a big volume of small trades on January 14 had almost doubled the price from $20 per share to $38 the next day. The stock market and the news noticed, and the increased interest sent the stocks all the way to almost $100 on January 25th, but then the price dropped a bit. On January 26, the price was at $88 when Musk sent his tweet shilling the Stonks, and then all hell broke loose, the price went all the way to $350 overnight, only to crash, bounce back, and then crash again to a more normal price around $44 USD at the time of writing, still higher than last year, and probably still overpriced, but stable.

Musk had helped to lead a revolution against Wall Street’s hedge fund managers, only for things to go back to normal. Lots of money changed hands, an unknown amount of small investors that listened to Musk lost money, several articles were written, and then we moved on to the next bubble (coughBitcoincough).

So what does this all have to do with decentralization, you may ask? At the heart of the GameStop bubble are a few interesting truths. Hedge funds do bet on the market, using short trading as a way to profit on the misfortune of some companies. The ethics of such a practice is not the remit of this blog post, but there is a genuine conversation to be had about the merits of a system that encourages some players to bet in this way. There is a valid perception in some circles that the system as it stands is rigged, and that for too long Wall Street has been dominating the market to allow a few fat cats to benefit, while the profits never trickle down.

Robinhood, wallstreetbets, cryptocurrencies, and even the Stonks meme, are a way to decentralize and democratize the rigged markets and make them more accessible to normal people. This is what is known as DeFi, decentralized finance which doesn’t rely on central financial authorities, and instead uses online tools to spread the wealth.

There is always a bigger fish behind the smaller fish eating the big fish.

Lovely idea, as an advocate of decentralization I would love for this to become a reality, but GameStop has proved that the game is still rigged.

The main problem is that the Wall Street vs Reddit narrative never really portrayed the reality of what was really happening. While smaller investors helped to move GameStop’s prices up, other hedge funds noticed what was happening and joined in the fun, injecting large amounts of money that pushed the bubble upwards, while at the same time betting on an eventual crash. It’s true that some hedge funds suffered initially, with New York hedge fund Melvin Capital losing over $2 billion USD, but they were bailed out by other hedge funds to weather the storm, which eventually happened when the price crashed. It has been reported that other large financial players made a nice profit playing the hype.The game is rigged after all.

Elon Musk, who had played a big part in hyping the stock, apparently never invested in it, but I believe GameStop was only an experiment, and the real deployment came after when Musk announced that he had invested heavily in Bitcoin. Here comes the bubble…

I will not comment on the Bitcoin news, and his similar shilling of Dogecoin, my opinion on the subject is well-documented. But the problem I see is that the likes of Elon Musk and hedge funds are actually killing the potential benefits of DeFi and other decentralization experiments. Small investors getting together to share insights and analysis is good, taking those groups and riding a Musk-led hype machine is bad. Wall Street are out to make a profit, they’re not your friends. Musk is not Tony Stark, he wants to keep playing silly buggers with the Tesla stock and ride it to new heights on the back of his Twitter feed and an army of weird nerds. In the process, they are making it difficult for real decentralization to occur, because everything Musk touches turns to meme, and one cannot change the world into a more distributed and fairer society on that alone.

What is there to do? Ignore the hype, block the shills, follow true decentralization efforts, support ethical and truly decentralized investment. In the end things will only change through ethical engagement that foregoes the siren calls of the meme merchants. Decentralization is still a worthy goal, but it might be difficult if it continues to be hijacked by those who just want to keep driving their own shares upward.

As Matt Levine pointed out:

“The best time to buy a stock is a few months before Elon Musk tweets about it; the best time to sell it is the day after he tweets.”

In the end, remember the words of García Márquez. Without wanting to go full conspiracy theory, the growing inequality around the world is only a corroboration that the financial elites are in it for themselves, and often make it difficult, if not impossible, to share the wealth. The system favours this inequality.

And if you think you’ll get rich riding a bubble, check your ass, it might be missing.