GameStop Bubble: Crypto-Exuberance and the Role of Fintech

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Credit: University of Southampton

Dr Larisa Yarovaya, Deputy Head of the Centre for Digital Finance in the Southampton Business School assesses the long term financial implications of the GameStop scenario.

The GameStop share price rose from $145 to $450 in two days following the movement of amateur investors against Wall Street’s short sellers, coordinated via social media sites and forums such as Reddit. This is an ideal example of a stock price bubble, i.e. when the price of an asset rises at record pace without any fundamental reasons for it. What makes this bubble unique and why has this story blown up over the internet, social media and stunned the Wall Street experts?

GameStop is a video game and electronics retailer, and until recently, probably, the majority of us had not heard anything about it, neither paid attention to its stock. It was not doing particularly well during the COVID-19 pandemic, which made large hedge funds bet against it. This is an example of short selling strategy which is found to be profitable and common on Wall Street. In a short selling, investors borrow shares to sell them almost immediately at a high price with the intention to buy them back when the price will decline. This strategy normally performed by experienced investors and hedge funds.

However, growing popularity of new Fintech trading platforms, such as Robinhood, allowed a large number of individual investors to interfere in this Wall Street game. Thus, amateur investors following active discussions on online forums decided to buy GameStop stocks in contrast to the hedge funds’ bet. It was a shock for everyone that amateurs actually managed to outplay Wall Street giants, and at odds to all expert predictions, the GameStop price actually skyrocketed in a few days. The short sale strategy of hedge funds failed, and amateurs celebrated a victory.

How can Finance research better help with understanding what happened with GameStop shares?

You can read many media articles and public opinions about it in social media now, but in the Centre for Digital Finance we have explored financial bubbles, especially those that are driven by Fintech innovation for over five years already. Here are some findings that can help to understand the GameStop bubble better.

GameStop is a brilliant case of the power of crowd money and the transformational role of Fintech in the stock markets. The idea of financial liberalisation is one of the most dominant causes of Fintech popularity and various applications of Blockchain technology, such as Bitcoin, crowdfunding, peer-to-peer lending (we categorise the Blockchain applications here).

The decentralisation and freedom from authorities made cryptocurrency assets particularly attractive to amateur investors, and consequently made this asset class sensitive to social media posts and news. This news field is bubble prone. The first bubble we analysed was the Bitcoin, Ethereum bubble at the end of 2017.

However, how can the stock of companies such as GameStop become explosive if they have nothing to do with Fintech or Blockchain? This might be explained by looking at the most recent phenomenon named by Fintech experts as “Crypto-exuberance”, i.e. the situation where companies start experiencing similar behaviour as cryptocurrency markets without any particular structural changes in their business model or operations.

In one of our recent papers we identified 82 companies that changed their names in the period from 30 December 2015 to 25 June 2019, simply changing their names from, for example “Long Island Iced Tea Corp.” to “Long Blockchain Corp.” causing an astonishing share price surge following the announcement. This can be also explained by actions of amateur investors who didn’t consider the actual intentions of the companies to implement blockchain technologies in their businesses, considering only name changes.

We showed that “crypto-exuberance” is a new form of information asymmetry, beyond the investment mania documented by previous studies, or “Dot.com” bubble. The recent GameStop bubble give me another reason to believe so.

GameStop excess volatility and spike in share price has also been driven by similar sentiment as crypto and Fintech movement. Online trading platforms make trading easily accessible to large a number of investors with various experience levels. For some it was a game and just a fun activity, for others, it’s almost a vigilante idea to battle with hedge funds. Thus, Facebook shut down the Robinhood Stock Traders group, while Robinhood and other trading platforms restricted the selling of GameStop shares causing further controversy and discussions on social media about lack of freedom and the very nature of capitalism. The GameStop share price fell following restrictions.

Decentralised assets and Fintech platforms are being heavily criticised by authorities and financial regulators due their explosivity and threat to the stability of the Financial System, and actions by Facebook and Robinhood are another example of this. Why are bubbles dangerous? They can destabilise financial systems and cause major losses to key actors on financial markets.

However, if there are many examples of speculative attacks conducted by large institutional investors, and short-selling itself is a speculation strategy, why should Fintech platform trading be restricted now? Did crowd money and young money threatened Wall Street? It is a strong reason to believe so. Fintech innovations will continue to challenge the financial system, regulators and traditional finance.