AZnomicsThe GameStop Short Squeeze
Reddit versus Wall Street — and for one glorious month, Reddit won
"A dying video game retailer became a $28 billion company in three weeks because of a message board."
In January 2021, a group of retail investors on Reddit's WallStreetBets forum noticed that GameStop — a struggling mall video game store — was the most shorted stock in the market. Hedge funds had bet billions that it would go to zero. The Reddit crowd decided to prove them wrong. What followed was the most dramatic battle between small investors and institutional finance in stock market history.
Short selling is when you borrow a stock, sell it immediately, and hope to buy it back cheaper later — pocketing the difference. It's a bet that a company will fail. Melvin Capital and other hedge funds had shorted more GameStop shares than actually existed — a short interest of over 140%. This was the trap. If the stock went up instead of down, every short seller would be forced to buy shares to cover their losses, which would push the price up further, forcing more buying. A short squeeze.
WallStreetBets coordinated buying. GameStop went from $20 to $483 in three weeks. Melvin Capital lost $6.8 billion — nearly half its entire fund — in January alone. Keith Gill, a retail investor posting as "Roaring Kitty," turned a $53,000 investment into $48 million. Celebrities tweeted. Elon Musk tweeted one word: "Gamestonk!!" The stock went up 70% in an hour. For a brief moment, the small investors were winning.
On January 28, Robinhood — the app most retail investors were using — halted purchases of GameStop. Only selling was allowed. The stock crashed. Congress launched hearings. Robinhood's CEO was grilled about who he was protecting. The episode crystallised a debate that hadn't been this raw since 2008: are the rules of financial markets written for everyone, or only for the people with enough money to write them?
GameStop taught three things simultaneously: how short squeezes work, how market microstructure (clearing houses, collateral requirements) shapes what retail investors can actually do, and how social media can coordinate financial behaviour at a scale nobody had designed the system to handle.