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We have received many questions about GameStop Stock (GME) and Bitcoin in recent weeks. We will cover the basics of these news makers below.

GameStop

What transpired to launch such wild swings in the company’s stock?  What market forces and/or participants were involved to transform a dying video game hardware and software retailer into the talk of Wall Street? It was a heady combination of short selling by hedge funds, activist investors, YouTube, gamma hedging and a Reddit message board that all came together to create one of the most amazing stock moves in history.

GameStop stock rose about 2,500% from early December 2020 to late January 2021, and about 8,500% from August of 2020.  The meteoric rise caught the eyes of investors, the media and regulators. The story starts with Michael Burry, who became famous for predicting the 2008 financial crisis in the book and movie The Big Short, and his hedge fund Scion Capital amassing a large stake in GameStop in the middle of 2020.

Around the time Burry’s Scion stake was taken, a YouTuber that went by the name of Roaring Kitty began posting videos with his thesis as to why GameStop’s stock was underpriced. It turns out that this YouTube personality was also becoming relatively well known on the Reddit sub-Reddit WallStreetBets.  His name there was DeepF****ingValue.   DeepValue, for G-rated short, was gaining notoriety for regular posting the account value of his options trades on GameStop stock. Almost no one on the sub-Reddit knew that he was also Roaring Kitty on YouTube.  He had been placing call options trades, it appears, on GME starting in January of 2020.  He had been a long time believer in GameStop’s value and  was initially ridiculed on the social media message boards for making what at the time appeared to be such a ridiculous bet.

The Michael Burry and Deep Value/Roaring Kitty trades were against the prevailing wisdom of Wall Street, most thought that GameStop was another dying retailer. The stock had fallen around 85% over the previous 5 years and was heavily shorted. When shorting a stock, the investor has a negative view on the company and is betting the stock price will decline. To exit a short position, the investor must buy the stock to close out their position. The short sellers appeared to be very certain that GameStop, which had been circling the drain, would be completely wiped out by the pandemic. So confident in fact, that the total short positons were in excess of the shares outstanding.

In the summer of 2020, GameStop’s stock was hovering around $4 and by the end of August GME was still around $4. All of the homework that Michael Burry and Deep Value/Roaring Kitty had done on the stock had yet to materialize in a rising stock price. Everything changed on August 31st when Ryan Cohen, the founder of Chewy (online pet supply retailer), purchased a 9% stake in the company. Cohen stated that he wanted to bring “our customer-obsessed mindset and technology experience to GameStop” and that he believes it “can enhance stockholder value by expanding the ways in which it delights customers and by becoming the ultimate destination for gamers.”

https://www.forbes.com/sites/joanverdon/2021/01/11/can-ryan-cohen-work-his-chewy-magic-at-gamestop-heres-a-possible-game-plan/?sh=57a7defd472a

The stock rose about 30% on the news.  The bad news for the short sellers is that this was the beginning of the tide turning for the stock and many short sellers did not appear to update their disaster thesis. They now had two smart and well-known investors – Burry and Cohen – on the opposite side of their trades. Amplifying the excitement around the stock was the little sub-Reddit WallStreetBets and the increasing interest in DeepValue/Roaring Kitty’s options trades. His call options purchases suddenly looked prescient as his account value began to swell.   He had turned a $50k investment into something north of $10MM. The sub-Reddit was now becoming rife with screen shots of stock and options trades in GameStop, as many – mostly small and inexperienced investors – wanted to get into the action and make money like DeepValue/Roaring Kitty.

The rising stock price coupled with a gigantic short position and huge volume in GME options, created the perfect storm to make GME stock rise very violently.  As the stock rose, the short sellers were forced to confront their losses, and they could either stay the course or close the position.  Again, to close the position meant buying the stock, causing even more upward pressure on the price.  This is called a short squeeze, when the stock rises so fast that the shorts are forced to buy all at once.

Next came the gamma squeeze.  Gamma is a measure of changes in options pricing – it results when massive call buying leads to higher stock prices, which leads to more call buying and stock prices spiral upward.  In this case, the gamma squeeze was triggered when the market makers such as Robinhood bought GME to hedge their risk.   This type of hedging is normal activity for market makers that goes on behind the scenes with any options trade and most of the time goes by with unremarkable outcomes. The market makers are merely trying to create a market for the options, and therefore attempting to hedge their risks in those markets. As GME rose, with an already large outstanding call option position, the market makers were compelled to buy GME stock to keep their neutral (hedged) positioning. This created even more upward pressure on the price.

The short squeeze, the gamma squeeze, and the sub-Reddit excitement that followed the entrance of Cohen was a buying tsunami that fueled the huge rise in the stock price. The stock rose from a low of around $4 to a high of close to $480 in this frenzy.  The stock eventually fell just as dramatically as it rose and is currently trading at around $52. Where GME goes from here is anybody’s guess.  The fallout has been broad. A couple of hedge funds needed loans from other hedge funds to survive the storm, and the regulators are now asking if anything that occurred was illegal.  While a few traders in the WallStreetBets community made once in a lifetime profits, many more lost money trying to day trade GME.  Throughout the whole drama, Cohen has been quiet about his long term plans for the company.

This feeding frenzy on heavily shorted stocks and Reddit, spilled into other stocks like AMC theaters, Koss Corp, and even to silver.

During the whole maelstrom, we held ETFs in certain Strategies that made some unusual moves as GME became a large holding of the ETF in a short period of time.  As GME has fallen back, its positioning in the ETF has also been reduced. We have left the ETFs in place as we believe that GME was merely a sideshow. We believe that the ETFs we own are still properly positioned for what we are trying to accomplish and do not want to be knocked off course by the behavior of one stock.

Bitcoin

The crypto currency has been making waves again as its rise has taken it to new heights with institutional investor getting involved. Bitcoin may have crossed the Rubicon to mainstream acceptance. Blackrock has given two of its mutual funds the ok to invest in Bitcoin, Morgan Stanley is investigating the same. Additionally, one of the oldest banks in the US, BNY Mellon, has announced that it will begin financing Bitcoin and other digital currencies.

https://www.cnbc.com/2021/02/11/bny-mellon-to-offer-bitcoin-services-a-validation-of-crypto-from-a-key-bank-in-the-financial-system.html

We positioned certain of our portfolio strategies to embrace the nascent technology of Bitcoin or the blockchain that it is based upon. We have done so in an indirect and measured manner.  We have equity holdings such as Square (SQ) and Tesla (TSLA) that either own Bitcoin directly or in the case of Square, also offers a Bitcoin exchange and wallet. We also own Nvidia (NVDA) which makes semiconductors and specialized graphics cards used by Bitcoin and Ethereum miners.

We own two ETFs that are designed to try to take advantage of Blockchain technology and the public companies that could benefit. The ETFs are AMPLIFY TRANSFORMATIONAL DATA SHARING ETF (BLOK), and The Siren Nasdaq NexGen Economy ETF (BLCN).

We will continue to keep our portfolios positioned to benefit from new technologies and asset classes whenever that can be done in a safe and cost effective manner, while maintaining liquidity and transparency.

 

General Disclosures: The content contained in this article represents the opinions and viewpoints of Cardan Capital Partners only. It is meant for educational purposes and not meant for consumer trading decisions.  All expressions are as of its publishing date and are subject to change.  There is no assurance that any of the trends mentioned will continue in the future.  Market performance cannot be predicted, so nothing in our commentaries is ever meant to provide any kind of trading advice or guarantee of future results.  Certain information contained herein has been obtained from third party sources and, although believed to be reliable, has not been independently verified and its accuracy or completeness cannot be guaranteed. Any reproduction or distribution of this presentation, as a whole or in part, or the disclosure of the contents thereof, without the prior consent of Cardan Capital Partners, LLC, is prohibited. Investments in securities entail risk and are not suitable for all investors. This is not a recommendation nor an offer to sell (or solicitation of an offer to buy) securities in the United States or in any other jurisdiction.

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