GameStop, Robinhood Fiasco Highlights the Need for DeFi
One of the biggest news stories of 2021 so far has been the incredible rise of GameStop’s stock (GME), driven by a loose collective of armchair investors who beat multi-billion dollar hedge funds at their own game. History has plenty of tales about ordinary people rising up against seemingly unstoppable forces, and there’s no shortage of anecdotes and films that reveal the underlying greed and corruption of powerful institutions. So, what is it about this story that has captured the imagination of people around the world, drawn the attention of regulators, and created infighting among the old guards of traditional finance?
There’s certainly a lot to unpack, and developments are ongoing as Wall Street resumed trading on Monday morning. Many people in crypto and DeFi, however, have noticed some familiar themes that have been discussed since Bitcoin first launched in 2009, particularly the economic dominance of an elite financial class increasingly bankrolled and protected by governments, central banks and regulators at the expense of average citizens. The most notable similarity between the GME feeding frenzy and DeFi, however, is that of a community recognizing its own power and rallying behind the same banner.
In 2019, a founding member of WallStreetBets (WSB), a Reddit forum for discussion about stocks and investing, bought $53,000 of GME. On the surface, it appeared like yet another high-risk gamble — who would invest that much into GameStop, a brick-and-mortar video game retailer that looked like it was about to face the same fate as Blockbuster? After a few large investments in the company and other positive signals, GME’s price gradually rose throughout 2020, reaching $17 in December 2020.
WSB users recognized that GME was just one of many stocks heavily shorted by hedge funds like Melvin Capital and Citron Research, which they frequently lambasted for their role in exacerbating the economic crash of 2008/09 with multi-million dollar shorts. Forum users noticed that, once again, both firms had poured millions into betting that GME’s value would fall, and were so convinced that they over-shorted it (which means they shorted it with more shares than actually exist).
Obviously, WSB users jumped at the opportunity to support a stock that could make them money and squeeze these funds. Since the hedge funds were overexposed, retail users could pump GME’s price enough to force a “short squeeze”, in which Melvin Capital et al. would have to buy GME to cover their short position, ironically driving up the stock’s price as they wanted it to fall. GME’s price rose parabolically from $43 on January 21 to $469 on January 28, the same day Melvin Capital “repositioned its portfolio” and closed its GME short.
Robinhood to the rescue?
It’s important to note that a large number of WSB members use the popular trading app Robinhood, a company that has proclaimed itself a leader in democratizing finance to “let the people trade.” On January 28, Robinhood inexplicably halted buys of GME and other stocks like AMC and Nokia. As expected, GME’s price immediately crashed as Robinhood users could only sell GME while institutional investors were free to do what they liked. Naturally, this caused immediate outrage, as the measure was neither properly justified or explained until sometime after the event and was put down to a collateral request from the National Securities Clearing House.
At the same time, a few of Robinhood’s biggest investors were the very hedge funds shorting suspended stocks. Citadel, one of Robinhood’s biggest customers, put up $2.75 billion to save Melvin Capital from total collapse, and its sister form, Citadel Securities, accounted for roughly 35% of Robinhood’s trading revenue. The optics and all-too-convenient timing of Robinhood’s actions were lost on absolutely no one.
GME closed at $225 on February 2, showing that the fight is not over yet. WSB has embraced the ‘hodl’ mentality to keep the pressure on, and other communities have jumped in to support their efforts. The cards are still being dealt, however, and what happens next is anyone’s guess. Needless to say, it’s a fairly unprecedented drama that has captured the attention of the media, politicians, regulators and citizens alike.
The power of community
The events that have transpired emphasize how powerful communities can be when they’re organized and committed. WSB’s simple goal of making money united them and managed to send some of the most powerful firms in Wall Street reeling. All it took was a little bit of analysis and a lot of dedication. Of course, WSB never set out with the intent of igniting a revolution, but they have shown that an online community can beat the institutions that have been taking advantage of them for decades.
Anyone who’s been in crypto long enough understands the power of community. Without early adopters, supporters and participants of the Bitcoin network, it never would’ve taken off, and we wouldn’t be in a position to talk about decentralized financial tools that democratize money.
Regardless of the tech, nothing progresses without the collaboration of individuals. The education in free-market cultures teaches us to believe that normal people can’t produce significant change within our financial systems, that we’re powerless and should conform. WSB swiftly demonstrated that it simply isn’t true, and decentralized finance is proving it.
A new way forward
While the David vs. Goliath parallel is compelling, WSB hasn’t systematically changed anything about traditional finance: short selling can provide benefits with respect to price discovery, exposure of fraud and legitimate downside protection in portfolio strategies. Whilst WSB may have beaten the hedge funds in the public perception stakes, they’re still playing the same game. Decentralized finance, however, is like a new sport with fairer rules: anyone can participate, no one can be censored, and markets can’t arbitrarily close. It replaces irksome referees with impartial robots.
DeFi is inclusive, open, transparent and immutable. Smart contracts dictate the rules, not people. As we’ve seen DeFi’s total value locked (TVL) grow exponentially over the past year, new developments and opportunities have arisen that have reshaped the way we think about finance. It’s not perfect, but it’s a pretty good starting point.
DeFi empowers people by allowing them to opt out of the systems that have historically excluded them, giving them access to conventional financial tools that have been deconstructed and rebuilt from the ground up. All of this requires new technology, networks and users. We think there’s a huge opportunity for end-users to participate in DeFi and earn high returns while avoiding unnecessary risks. DeFi’s evolved, and YIELD App gives users the chance to participate without navigating the overwhelming sea of protocols while still obtaining market-beating earnings.
At YIELD App, we strongly believe DeFi is the future of finance, one that is more inclusive, transparent and democratic. Our mission to bring DeFi and bridge it with CeFi will be an exciting journey, and we look forward to sharing the experience as a community. Game on.