A little story on the stock market right now. Is Cryptocurrencies next?

By Itech | Crypto trading tips | 28 Jan 2021


I know at least one of my followers does not quite understand what is happening in the stock market right now and that is enough to motivate me to explain because this is somewhat of a turning point in world history.

Firstly your need to understand what a "short" is in trading. A short is when you borrow a stock from a broker and sell is it immediately at it's current price. Then you hope the stock price falls for you to buy it back at a more cheaper rate but also keeping the difference.

Example: let's say I want to short XYZ which has a current price of $10. I borrow 1 share and sell it immediately at $10. I have $10 now but I owe my broker the 1 share I borrowed. Then let's say  the price of XYZ drops to $7, I now decide to "cover" (buy it back) my short position and buy 1 share at $7 and return I borrowed share to my broker. I made $10 when I sold and only had to pay $7 to by it lower, so my profit is the $3 difference.

But now let's say that instead of the XYZ price dropping to $7 it goes up to $15. I still need to return the 1 borrowed share to my broker, except now it's going to cost me alot more to buy it back. If I buy it back at $15 so I can return the borrowed share, my losses will be the $5 difference between selling at $10 and re-buying at $15. Since the price can rise indefinitely, my potential losses as a short seller are unlimited. At some point I have to buy it back to return the shares I borrowed. The more the price rises, the bigger my losses.

Now for the GameStop, a few weeks ago a redditor on r/wallstreetbets noticed that a hedgefund had taken a massive amount of short trades against GameStop. They combined everyone on the thread to join forces and buy as much GameStop stock as possible. This made the price rise and the hedgefund's short position started to loss billions. Their losses surpassed the 13.1 billion that the hedgefund was worth. Eventually, the hedgefund had to close their short positions and buy all the GameStop stock back at much higher prices sending the price even higher still. This is called a short squeeze.

Now the hedgefund is declaring bankruptcy, and the Reddit thread is combining through other hedge funds with massive short exposure so they can short squeeze them into bankruptcy as well. All of wall Street is saying that the public joining together in this fashion to be illegal, but really they just lost at their own game to the masses.

Robinhood In respect to the recent development had to restrict transactions to some Security assets such as AMC and GME.

And this has lead to a recent case filling against the exchange.

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Itech
Itech

Cryptocurrency Investor.


Crypto trading tips
Crypto trading tips

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