Democratized Finance & Civil Disobedience

[This is not intended to be investment advice. I am not a registered investment advisor. Please be careful.]

I rarely write anything on the internet these days (really feels like more of a liability than anything else in this social climate), but I’m compelled to share my thoughts around the recent Gamestop ($GME) short squeeze & why this situation is a pivotal moment in our collective recognition & response to the corruption, gatekeeping, & regulatory capture of our financial system by Wall Street.

__________________________

For anyone that hasn’t been following, the situation can be reasonably summarized as follows:

1. A hedge fund called Melvin Capital (Institutional traders) made a very large bet that Gamestop ($GME) was overvalued and took out a short position for *more shares than existed* (a short is when you borrow someone else’s stock, sell it, & then rebuy at a lower price to pocket the difference — you then have to return the borrowed stock to the lender). This was an extremely risky move.

2. “Retail traders” (i.e. the average joe), primarily on the r/wallstreetbets subreddit, conducted their own due diligence — where they determined that Gamestop was instead UNDERVALUED and began taking long positions (buying the stock with the belief the value would go up & that the hedge funds shorting the stock would be forced to cover their short positions). “Covering a short” means the hedge funds are forced to buy the stock they originally sold at a significantly higher price in order to return the stock to the lender. Since the hedge funds are forced to buy the stock back to cover the short, this results in a rapid increase in price (what is referred to as a “short squeeze” & is precisely what the r/wsb traders identified as the opportunity).

3. More and more traders piled in as this began to circulate the internet. $GME climbs hundreds of points and the hedge funds that are stuck in the short position realize how dire the situation is. Melvin doubles down and takes a 2.5 billion loan from another huge investment firm called Citadel (which happens to have a controlling interest in Robinhood) & opens more shorts at higher prices. It doesn’t work. So now they use every dirty trick in the book — which include:

• using the media to craft a narrative that the retail traders are somehow breaking the law, manipulating the markets, and nudging regulators to go after them, etc. (nothing illegal has been done by the r/wsb traders)
• directly encouraging regulators & law enforcement to go after retail traders
• using trading tactics to give the appearance of more people selling than are actually selling (i.e. legit stock manipulation)
• & the worst (& likely most illegal) of them all — colluding to restrict the ability for retail traders to continue buying $GME on Robinhood & other large brokerages. They did not restrict the ability to sell (which helps the stuck hedge funds because they want a lower price).

__________________________

This is where we currently are.

This exemplary instance of a Wall Street hedge fund taking such an unconscionable risk confirms what so many of us have believed about Wall Street after living through the 2008 financial crisis. Now, more clearly than ever, the world can see the hypocrisy & perverse structures of these marketplaces, including the lack of response by the regulatory agencies tasked with protecting all investors.

But this is only one piece of this story. It’s one thing to observe such behavior, but to fight it is another. To fight using the same tools these bad actors wield.

So now we see a global movement emerging. The more people read about this, the more people pile into the stock with the sole purpose of squeezing the hedge funds. The communication & resilience of online communities has allowed everyday people to share information & come to their own conclusions. To empower them. (There is substantial risk that retail buyers lose considerable amounts of money here — my observations here relate to the dynamics of this situation, not whether $GME is a good or bad buy.)

It’s monumental. This is the convergence of social media, democratized finance, & civil disobedience. Much of what these retail traders are doing mirrors the type of analysis you would see within an investment firm (with the added benefit of dank memes).

For years the institutional participants & regulatory bodies that govern these systems have gatekept financial markets, conditioning the public to believe that finance is some kind of voodoo magic that only a select few are equipped or privileged to work with. This is by design.

There is a reason so many people are financially illiterate.

There is a reason the financial industry is composed of countless middle-men that exist only to extract fees from a public composed of so many that believe they are unable to learn & interact with the financial system themselves. I used to be intimidated myself.

This is not just about finance, but also our collective values, culture, and at the end of the day — our liberties.

What is really interesting about this whole situation is that the same principles that guide those of us working in the crypto space are the same ones inspiring those outside of our community. Such principles as:

• fairer markets
• easier access
• lower fees
• censorship resistance
• acknowledging bad faith regulation

And when all these pieces come together, the picture becomes clear. That the future of finance & governance IS decentralized. That individuals can be empowered to equip themselves with the knowledge necessary to participate. And that we must create a level field for all people to build and invest on.

If Wall Street is so passionate about “free markets”, maybe it’s time that the people show them one.

[If you are interested in learning more about how crypto/blockchain related to any of the stuff I just said — feel free to ask questions. Also I value criticism, so please challenge me. Thanks for reading]