💵 This is How Wall Street Becomes Obsolete
The internet of money is about to rule finance.
We’re witnessing a turning point in finance. The time when young, online traders, were able to band together to achieve their own financial goals. We’re seeing what happens when those financial goals clash with large entities, who have been controlling the game until now. They cry time out and claim foul play, even though no rules were broken.
This anti-establishment ethos is not new to cryptocurrency enthusiasts; it’s why peer-to-peer money was created. The limited trading on investment apps, the shutting down of social media forums resulting from this trading frenzy —it’s the product of dealing with the old guard and people are fed up. They’re angry. Luckily, a new system where individuals can be in control is being built. That’s why decentralized finance will win. It’s simply better. Freer.
Read our piece on this watershed moment below.
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GameStop stock (GME) is going to the moon. So are AMC Theaters (AMC), Nokia (NOK), BlackBerry (BB), and maybe even Bed Bath & Beyond (BBBY)—just ask the shitposters on Reddit’s r/wallstreetbets (WSB).
The WSB saga has been a fascinating black box for anyone interested in finance (or wealth redistribution, or sticking it to the man), and it centers around an anti-institutional ethos that has many parallels to DeFi. The DeFi community might even be able to take a lesson or two from the memelords at WSB —and vice versa.
But before we get into the DeFi connection, here’s a rundown of what’s happening:
The old guard of the mainstream stock market is currently in hysteria over a community of Reddit retail traders, many without any prior investing experience and operating entirely off of the RobinHood app, who are waging a massive war of attrition against institutional short sellers.
Short sellers borrow a company’s stocks with the expectation that those stocks will soon drop in value. They immediately sell the borrowed stock, wait for the stock value to drop, and then buy the stocks back at the lower price to return to whomever they borrowed from and profit from the difference. If the value goes up, the short seller will be forced to repurchase the stocks at a higher value, pushing the stock’s value up even further.
Public Enemy #1
Members of WallStreetBets typically view Wall Street professionals as greedy predators. Short sellers, who capitalize on the failures of others, are public enemy number one. Fueled by this disdain for mainstream institutions, some WSB members devised a strategy.
If enough WSB community members buy into a heavily shorted stock, demand and price will go up, and short sellers will be screwed into selling at ridiculously inflated prices. Moreover, anyone on WSB who bought those stocks low could sell at the peak for massive profit.
The WallStreetBets community, which brands itself as “Like 4chan found a Bloomberg Terminal,” has historically been a space for amateur investors to meme about risky stock trades (which they often lose money on). “YOLO” posts commonly boast about throwing money behind underperforming companies while ironically pretending that those companies have bright future prospects. So when a user who went by u/DeepFuckingValue posted about buying $50,000 worth of GME stock in 2019, WSB took notice.
Considering many WSB members are millennials (or younger), GameStop—a common target for short sellers that simultaneously has heavy nostalgia ties for younger gaming demographics—seemed like the perfect horse to rally behind.
WSB members identified Jan. 29, 2021 as the day that many GME short contracts were set to expire, including those held by major hedge funds Citron Research and Melvin Capital. By November 2020, many members of WSB had invested heavily in GME.
At the beginning of November, GME was under $11. By the start of 2021, GME was over $17. By Jan. 13 GME had climbed over $30. The momentum kept building as the price went up to $65 on the 22nd, $147 on the 25th, $347 on the 25th.
$5B in Losses
As a result, GME short sellers have now lost over $5B. Melvin Capital is nearing bankruptcy. Nobody knows exactly what’s going to happen next, and some late train boarders will likely be left holding some of the bag, too. But u/DeepFuckingValue held onto his $50,000 investment from Nov. 2019, and is now sitting on close to $50M in GME. He still hasn’t cashed out.
Just like early adopters to BTC and ETH, some people are about to get very, very rich. And just as some newcomers lost a lot of money in the 2018 crypto bear market, some people are likely going to get a harsh reality-check.
More importantly, though, WSB has leveled a massive blow to the world of institutional finance. If a bunch of average, young, non-professional traders can band together on Reddit and make a joke of the mainstream financial world, then clearly their centralized power is no longer safe.
In this sense, the DeFi community and the WSB community are on the same page. When it comes to the overall vibes, however, both communities feel very different. Sure, both are full of memes and shitposts and in-circle lingo that might alienate outsiders. But the WSB community feels much more welcoming and supportive of its members than the crypto space.
To be sure, WSB members still argue about which stocks are the best, and anyone who isn’t all-in on GME right now risks being deemed a corporate shill. But overall, WSB is a place where everyone wants everyone else to succeed, and when somebody does succeed, everyone is happy for them regardless of whether or not they took part in the successful bet.
Contrast this to the crypto and DeFi community, where in-fighting is constant.
DeFi & WSB: Shared Anger, Different Paradigms
Can crypto learn anything from r/wallstreetbets’ unified execution of a short squeeze? The degree of social coordination involved is something the space as a whole aspires to, yet often falls short.
A reddit post in r/cryptocurrency (which, like r/wallstreetsbets, boasts a million plus subscribers) entitled, “Honest question: why can’t the crypto community come together and act as one like the r/Wallstreetbets community did this week?” shows the frustration of the digital asset community.
Not Enough Shorts to Squeeze
Some responses suggested that no crypto token exists with the kind of short pressure which GME has. The gaming company’s stock currently sits at a float rate of 140% according to FinViz, which means that brokers have loaned more GME stocks to short buyers than stocks available.
Crypto may not have enough shorts to squeeze. But that misses the broader issue. It’s not about achieving this specific, financial strategy; it’s about coordinating with and supporting other community members.
A thread by Twitter user Cold Blooded Shiller took a different angle as the poster enumerated the different factions of crypto, ranging from “shillers,” to “maximalists,” and “religious” types.
Tensions between developers and traders, venture capital and developers, venture capital and traders, has also arisen, as have numerous conflicts, some arguably necessary, over technical specifications like the recent pushback EIP-1559 received from Ethereum miners.
Digging deeper, it appears the similarities between the two “degenerate” communities don’t cut so deep. DeFi represents the efforts to build a new financial system. WSB wants to burn the old one down, or at the very least, beat it at its own game.
In a simple game with an easily identifiable villain, unity is easy. It’s WSB versus Wall Street.
But, DeFi, as an innovative industry, faces the more nebulous challenge of surmounting, innumerous technical and regulatory obstacles, as the space attempts to develop into something that a person following the WSB ethos could eventually embrace.
DeFi is not a simple community of builders. If it were, perhaps it could achieve the unity of WS. But DeFi involves traders, venture capitalists, idealists, and perhaps most importantly, builders, from which much conflict stems.
And that’s just this one niche. Challenges and villains are different for other sub communities within crypto: Bitcoiners, Ethereans, LINK marines, XRP army –– they all have different world views and goals.
As the old saying goes, it’s easier to destroy than create.
DeFi is a Better Financial System
Maybe crypto twitter could learn a lesson from the WSB community, but if traders in both worlds are ultimately looking for the best ecosystem to put money to work, then WSB should take a look at decentralized finance.
DeFi is, at its core, open, non-custodial, transparent, and decentralized. Its exchanges cannot be shut down, and hence cannot be subjected to intermediation.
That’s not the case in traditional stock markets as the WSB frenzy served up one more example after another of the dangers of centralization. Nasdaq CEO, Adena Friedman said on CNBC yesterday that the stock exchange, upon seeing “unusual trading activity” would “potentially halt that stock to allow ourselves to investigate the situation, to be able to engage with the company, and to give investors a chance to recalibrate their positions.”
Today, Robinhood, the app many WSB traders used to buy GME, appears to have limited access to GameStock and several other WSB favorite stocks, fanning the flames of anti-establishment rage.
Digital assets on decentralized finance trade on permissionless protocols. There is no entity who can single handedly limit their access.
And for all the ––most times justifiable–– complaints about confirmation times and gas costs, traditional finance can also break down under the weight of heightened activity.
“Robinhood was down for 2 hrs; TD Ameritrade has placed restrictions on GME trades; Trading 212 had disrupted service; Regulators suggested a 30-day GME halt,” tweeted Nick Chong of ParaFi Capital.
Additionally, as has been documented, Robinhood sells data to high-frequency trading firms, allowing them to front-run the market. This means that while some institutions are in the limelight and at the brink of bankruptcy due to WSB’s buying, still others are profiting on the short squeeze.
At its most meritocratic, DeFi turns everyone with an internet connection into a potential investor, and opens up the same suite of financial products accessed by institutions to individuals. There is no privileged information; all the data is publicly available on the distributed ledgers where assets trade.
With Discord’s banning of WSB’s channel, it may be time for the two groups of degenerates to talk.
As the meme goes, ape together strong.
TLDR Reddit announced a partnership with the Ethereum Foundation, a sign it’s betting on a more decentralized internet and doubling down on the leading smart contract platform.
COMMUNITY POINTS The social media company and the foundation started collaborating last year with the Scaling Bake-off, a scaling technology competition. Reddit is also exploring Community Points - or non-transferable ERC20 tokens which can be earned through active usage of various subreddits.
TLDR Zora Protocol has unveiled documentation around its universal media protocol, offering developer tools to create perpetual markets for NFTs by baking an order book directly into the token.
CRYPTOMEDIA Zora’s protocol creates assets that contain a market and media component, allowing NFTs to become independent of the platforms they are issued on, a concept they have called “cryptomedia.” Mirror and Catalog are some of the projects building on the platform.
✊ Head to THEDEFIANT.IO for more DeFi news 📰
🧑💻 ✍️ Stories in this newsletter were written by Daniel Kahan, Owen Fernau, and Cooper Turley, and edited by Camila Russo.
The Defiant is a daily newsletter focusing on decentralized finance, a new financial system that’s being built on top of open blockchains. The space is evolving at breakneck speed and revolutionizing tech and money. Sign up to learn more and keep up on the latest, most interesting developments. Subscribers get full access, while free signups get only part of the content. Click here to pay with DAI (for $100/yr) or sub with fiat by clicking on the button above ($10/mo, $100/yr).