A recent study has shed new light on the unprecedented surge of GameStop's stock price in January 2021, revealing the influence of Reddit in the GameStop short squeeze that almost shattered the stock market.
Published findings on the pre-print server arXiv provide compelling evidence of a causal relationship between activity on Reddit and the wild market fluctuations that captured global attention.
The GameStop Short Squeeze
If you ask the Internet who started the GameStop short squeeze, which saw the company's stock skyrocket by over 1,625% in just a week, many will answer you that it was fueled by coordinated action among Reddit users, particularly in the r/Wallstreetbets subreddit.
A new study has found specific evidence to support the theory of coordinated Reddit activity on GameStop in 2021.
The study, conducted by researchers utilizing Granger causality testing, analyzed detailed data from Reddit, Twitter, and stock trading activities. Their findings indicate that discussions on Reddit predicted increases in trading activity before the short squeeze and served as a central platform for coordinating investment efforts.
Upon recognizing what they perceived as undervaluation in GameStop's stock, Reddit users began buying it en masse, causing panic among short sellers who rushed to cover their positions.
The resulting surge in stock price made millionaires out of some and led to significant losses for others, including large hedge funds like Melvin Capital Management LP and even high-profile individuals.
Reddit and Twitter
But how did they do it when estimates say Redditors were only 1% of GameStop's total market capitalization?
The study also revealed a shift in Reddit's influence once its actions became widely known through Twitter, especially when Elon Musk tweeted "Gamestonk!" with a link to Reddit and made the short squeeze known to the public.
While initially driving market activity, Reddit's impact diminished as users turned to other platforms for information and discussion.
The GameStop short squeeze drew attention from the media and prompted politicians to vow investigations and reforms in the investment community. The incident served as a wake-up call for institutional investors, highlighting the power of social media networks and online communities in influencing financial markets.
This study provides valuable insights into how digital platforms can catalyze collective action and underscores the growing role of social media in shaping investment decisions.
As the GameStop hype spread, Reddit users began discussing and investing in stocks like AMC, Nokia, and BlackBerry, demonstrating the potential for large-scale coordination in financial markets through online communities.
Despite the legal and regulatory aftermath, including lawsuits and congressional hearings, the GameStop short squeeze remains a landmark event in the intersection of technology, finance, and social media - and memes.
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