The GameStop Infinite Money Glitch Explained

What's up you, Graham? It's guys here, and today we got to talk about one of the most requested, most mind-boggling topics of investing insanity that I have ever seen. That's happening right now and causing some people to make millions of dollars in the process, and that would be GameStop.

That's right, the same company who would give you pennies of store credit for your brand new trade-ins has now become the hottest money maker of 2021. All thanks to a fundamental shortcoming that was discovered by a user of Reddit's Wall Street Bets not too long ago.

Now they say the current market conditions have set the stock up on a trajectory to continue plowing higher and higher, almost becoming like an infinite money glitch. As short sellers have to buy in to cover their losses, which causes the stock price to rise higher, which causes more people to buy in to cover their losses. This just continues until, you know, when the moon.

So, in a remarkable, maybe once-in-a-lifetime event that's showing up on the front page of every major news outlet in existence, let's cover exactly what's going on. How some people are making so much money, how this is even allowed to happen to begin with, and what this means for you, whether you're just curious how this works or if you've been seeing this mentioned everywhere and you want to know if it's too late to invest your money and print attendees.

But before I go into all of the tantalizing money printing details, I need you to do a quick favor for me and diamond hands that like button for the YouTube algorithm. That's right, every like on this video directly supports the families of short sellers who had to buy in to cover their positions, even though they had to lose money. Just kidding, it doesn't do that at all, but it's totally free. It helps me out, and thank you so much!

Oh, and also full disclosure here, but don't do anything I'm talking about in this video. It's incredibly risky. I am just a guy on YouTube making videos from a spare bedroom. You should not listen to me, and you should always do your own research because this is all for entertainment purposes only, and none of this should be investing advice.

So now that I've cleared up that confusion on what not to do, let's begin the video here. Alright, so first, GameStop. I pretty much guarantee we all remember at some point walking through a mall or an outdated outlet center and passing by a store with the unmistakable big, bold white and red words "GameStop."

Like the name would suggest, this is a retail gaming shop that sold video games, consoles, controllers, and collectibles. They would take trade-ins while driving a harder bargain than Rick from Pawn Stars. More recently, they began offering subscription services where you could rent games for a fixed price per month.

But as the overall video game markets began outgrowing the store, and more and more people resorted to online downloads versus shopping in-person at an outdated mall with nothing left in Nordstrom's, GameStop was beginning to be left behind, much like the greats of Toys R Us and Blockbuster.

But one investor, despite all of this, decided to step up to the plate on Reddit's Wall Street Bets to begin turning things around. Now, some people say this person is a genius, and other people think he's crazy, but I personally think he's a crazy genius who also happened to be very lucky.

And this is where the story starts getting really good. Unfortunately, I can't say the full username here without getting demonetized on YouTube, but DFV, as I'll refer to him, invested 50 thousand dollars into GameStop call options in September of 2019, as the company's stock price plummeted to its lowest level in history.

However, he felt the company was fundamentally undervalued. Not even a few months later, the famed investor Michael Burry announced his optimistic position in the company for one simple reason: disks.

See, even though it's easy to look at a company like this and think, "Uh, they're just gonna be going out of business in a year. Now it's just a matter of time," Michael Burry felt like this negative sentiment wasn't deserved because both Microsoft and Sony were releasing their next-generation game consoles, which would have discs for people who wanted to buy a physical copy.

Michael Burry believed that this would extend the price of GameStop and their stock price, which at the time was trading between three and four dollars a share. Well, that was all back in late 2019, and our Reddit user DFV has been holding ever since, despite constant replies telling him he's an idiot and should get out ASAP.

In fact, he just kept buying more, even through the shutdowns, the GameStop controversies, refusing to close doors, and horrible earnings. He just had diamond hands and kept doubling down. At that point, he posted a screenshot on Reddit of his investment where he was down 34 thousand dollars.

But now this is where things get interesting, as though it wasn't already interesting. But this is where it starts to piece together. In June of 2020, GameStop announced that they saw a 519 percent jump in online sales when they were forced to shut down their physical locations.

In August of 2020, the billionaire co-founder of Chewy.com announced that he bought a nine percent stake in the company and planned to turn it into an Amazon rival through his active involvement and re-management of the company. After that, they announced a multi-year strategic partnership with Microsoft, which plans to expand both their physical store and their digital store.

Sure enough, digital sales increased, and the Chewy.com co-founder increased his stake in GameStop to now 13%. That's when, about four months ago, users of Reddit's Wall Street Bets discovered a very little secret about the stock that would cause it to skyrocket exponentially, just given the right conditions.

And sure enough, he was right, and everything he said would happen has now come true. He explained that GameStop was one of the most shorted stocks in the stock market, with almost 90 percent of the stock holders believing the stock price will go down.

In fact, it was so shorted that more shares were shorted than actually exist in the market for sale. So that's turning out to be the perfect storm to cause this stock to skyrocket exponentially as soon as any good news comes out.

See, this is what's known as a short squeeze, and here's how that works. When you think the price of a stock is going to be going down, you could choose to short that stock, and because it's kind of complicated to explain, I've made this really fancy Photoshop so I could explain exactly what's going on.

When you short a stock, you first borrow that stock from somebody else at a preset price, with the intention of eventually returning that stock to the person at some point in the future. Next, once you borrow those stocks, you could resell them immediately to somebody else, and you get to hold on to that money.

But since you owe that first person their stocks back, that money you get isn't all profit. If the price of the stock you borrowed and sold goes down, which is what you wanted, you could buy them back at a cheaper price, return the stocks back to the first person who you borrowed them from, and then the difference you have left over is your profit.

However, the danger is that if the stock price goes up, you will be forced to buy back the stocks at a higher price, and when that happens, you'll lose money when eventually you have to return those stocks. Now doing this is incredibly risky because when you go and buy a stock like normal, the downside is really going to be limited to the amount you buy in.

So for example, if you buy a 10 dollar stock, the most you could lose is that original 10 dollars. But if you short a ten dollar stock and it goes to a hundred dollars, then all of a sudden you're losing ninety dollars for every ten dollars you're investing in.

And by shorting a stock, your losses could theoretically just be infinite, and that is where GameStop comes in. This Reddit user who posted here theorized that because so many people were short on GameStop, thinking that the price of the stock was going to be going down, eventually all this good news was going to cause these short sellers to exit their positions, forcing them to buy back those shares at a higher price.

And when that happens, the price of the stock goes up, and when that happens, more people close out their positions by buying back shares at a higher price, and that continues until the price of GameStop goes to the moon and Reddit users buy Lamborghinis.

But this is not any old short selling activity. Oh no, this is the perfect storm of short selling! Remember how I told you that almost 90% of all GameStop stocks are shorted and there are more shares shorted than actually exist on the market? Well, uh, yeah, you're going to want to hear this.

When the price of a stock goes up and short sellers want to get out, they actually have to go and buy that underlying stock so they could give it back to the person they borrowed it from. But what happens when more shares are shorted than actually exist on the market for sale?

Well then they have to offer more money to buy someone else's stock, and if no one wants to sell their stock, then the price just keeps rising exponentially until eventually someone raises their hand and says, "Okay, fine. You know what? I don't really want to sell my stock, but I will if you give me a thousand dollars."

Well, at some point, they're just going to need to pay that price, and that's kind of what's going on here. See, Reddit's Wall Street Bets saw the writing on the wall, and they all collectively said, "If we all buy call options on GameStop, which is an option to purchase 100 contracts at a specific price at a specific point in the future, that's going to cause the brokerage to actually go and buy those 100 underlying shares of the company, further driving up the price."

And that's going to cause all the short sellers to have to sell, but since we're buying all of these stocks and we're not selling them, the short sellers are going to have to offer us way more money if they want to exit their positions. And that in turn is going to make us all very rich.

And guess what? Since there's been more news about GameStop going up in value, that's caused more retail investors to pile into the stock, driving up the price and making it very difficult for short sellers to find people who actually want to sell their stock because those buyers know that the longer they hold out for, the more money short sellers will have to pay and the more money they will make.

And then, of course, you throw in Elon Musk tweeting about it, and uh, yeah, here's where we are now. Literally right now, as you're watching this video, there's a tug of war going on between institutional investors who are shorting the stock and Reddit's Wall Street Bets.

Reddit's Wall Street Bets have single-handedly banded together to buy up as many GameStop call options as possible, further driving up the price and causing short sellers to lose a lot of money. And it worked! Large institutional investors have lost tens of millions of dollars, and the little guy who decided to take a chance on GameStop is now raking in money.

Or really, in more simple terms, just think of it like this: Imagine that Thanksgiving is coming up next week in a really wealthy town where turkeys normally sell for $30 each, and one family in particular promised to host the biggest Thanksgiving feast of all time, no matter what.

Well, you know this in advance, so you coordinate to buy up all the turkeys so that there are no more left by the time the family wants to buy one. When this family starts to panic about no more turkeys being left, you come out of the internets and say, "Well, I have plenty of turkeys for sale, but it's gonna cost you a thousand dollars; otherwise, you're not gonna have your dinner."

Sure enough, the family would pay the thousand dollars, even though the turkey is not worth it, just because they promised that they would host the biggest Thanksgiving feast of all time, and they have to buy it. That's what happened here. But instead of a wealthy family, we have institutional investors, and instead of a turkey, we have GameStop.

Oh, and remember the Reddit user who invested 50 thousand into GameStop in 2019? Recording this after hours, but it's now worth over 22 million dollars, even after closing out some of his earlier positions and taking some profit.

Now as far as where this goes from here, it's really anybody's guess. People have been posting heavily researched articles with price targets anywhere from a hundred to a thousand dollars a share or higher, and I guess theoretically anything is possible. If enough people refuse to sell in the right conditions, it could go to a thousand dollars before then crashing back down.

But this is 100% a game of musical chairs, and most likely 90% of investors are going to lose money on this big time. At this point, it has nothing to do with the fundamentals of the company at all, but it does have to do with a very unique situation of a limited quantity of shares available combined with an insane amount of short interest, combined with Wall Street Bets coordinating to purchase call options driving up the price of the stock, which causes more people to pile in, and it's a perfect storm when those people refuse to sell what they just bought.

The difficult part of this just becomes how soon do you get out, and when does this reach the top? Is that gonna be $250, $500, $1,000, or $1,200 or even higher? Nobody knows!

And realistically, if we knew, for example, the peak was going to be, let's say, a thousand dollars, you would have someone else selling it at $990, which means someone else would sell at $980, which means someone would sell at $970, and then one person would just undercut the other who undercuts the other before there's nothing left.

This is probably one of the riskiest, most speculative bets I have ever talked about here on the channel, so as my word of caution, gear, don't do it. But that doesn't mean this has not been profitable, and this could very well just be the beginning of this stock continuing to move even higher.

But really, everything you're seeing right now is just a wild guess, and it could just as well go down as it could go back up. More importantly though, this does represent a big shift of power away from large corporate institutional investors and into the hands of retail traders and groups like Wall Street Bets, who do have the power to move markets and build demand.

I honestly believe the power of retail traders has been grossly underestimated for quite some time, and this is a good example that a group like Wall Street Bets should not be taken lightly. But do not kid yourself into thinking that this is a foolproof way to make money. Just like some people have become overnight multi-millionaires, someone else is going to be left holding the bag, losing a lot of money.

I have no clue when that point might be; maybe this goes up another 500 percent, or maybe it doesn't. Some people want to hold out for that magic thousand dollar mark, and hey, you know what? Maybe that's possible. I would love to see this go to a thousand dollars because I find it so entertaining to watch and just see what happens.

But whether or not that becomes a reality is just anybody's guess. I would say the big takeaway here is just this: investor behavior is the driving force of the market right now. Fundamentally, GameStop is not worth this price, but that doesn't mean this specific situation can't cause it to rise even higher.

And guaranteed, this event is going to cause a lot more institutional money to pay very close attention to what's being said and what's going on in communities like Reddit's Wall Street Bets, and most likely they're going to be using all sorts of trading algorithms to comb through all the data that's being posted on these sites and placing their trades according.

This is going to create a brand new type of investor who is not swing trading, who's not buying on fundamentals, who doesn't care what the company is or how well that company is doing. They're going to trade based on hype, behavior, and trend, just knowing that if they could catch the next GameStop or Palantir early enough, they're going to make a lot of money.

And I think they're also going to take websites like Reddit's Wall Street Bets very seriously because that's where a lot of these trends might begin. Even though it's incredibly risky and I don't endorse it, don't fool yourself into thinking that this is a guaranteed way to make money because I can assure you it is not.

But thankfully, there is a guaranteed way of making money, and that would be using the link down below in the description because Webull is going to be giving you four free stocks when you deposit $100 on the platform, and those stocks could potentially be worth all the way up to $1,600.

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So with that said, you guys, thank you so much for watching. I really appreciate it. As always, make sure to destroy the like button, subscribe button, and notification bell. Also, feel free to add me on Instagram; I post pretty much daily. So if you want to be a part of it there, feel free to add me there as my second channel, The Graham Stephan Show.

I post there every single day I'm not posting here, so if you want to see a brand new video from me every single day, make sure to add yourself to that. Thank you guys so much for watching, and until next time!