Old timers used to do this in the past: Pump-and-Dump
NOTE: It may not be the same now/today but it sure looks very similar.
So it seems 2021 is going to be the year that internet culture finally reaches the deepest and most protected pockets of society. The past day has seen the kind of demented activity on the stock market that normally comes with an era-defining crash – except in this case it was Reddit readers who are, um, having a laugh while …
To be fair, it's pretty hard to short-sell bitcoin, when it's pretty hard to "borrow" from an anonymous bitcoin wallet without actually putting that transaction onto the blockchain. It has been up and down like a yo-yo for the last few weeks anyway, so there are plenty of "traditional" risks to take instead.
I see bitcoin as much more of a technological curiosity. I bought some cheapo "mining" gear for about £150 about 6 years ago, when it was still practical to use the USB miners in a mining pool. The fraction of a bitcoin I managed to mine while it was still practical is now worth around £2000, so on paper it's a profit. I'll hold onto it for another five years or so, and see where it is then. Either it'll be worth less than I "invested", or potentially enough for a deposit on a house. Either way, it's a long-shot curiosity, on an amount of money I can afford to write-off.
Indeed. The history of all transactions is written into the blockchain in perpetuity. It is essentially, a massive ledger that gets cryptographically signed again with each new entry (or "block"), so once a certain number of further blocks are "mined" (essentially calculating the key for the hash), typically ten, to statistically prevent race conditions, those transactions are set in stone.
Each transaction is between two "Wallets", each with its own id, so you can trace all transactions between wallets and know how much has moved from any one wallet to another.
What isn't so easy to know is who controls each wallet address, as they are essentially anonymous. However, it is not impossible to identify wallet owners with a bit of detective work, if you know enough about the timings and transaction amounts, especially if those transactions occur on exchanges, where they authenticate the users and their wallet addresses.
Sure, it's possible to "mine" a block, if you have the computational power to do so, and then transfer that to someone else's address, without anyone ever knowing who you are, but the moment you want to do that for cash, you either have to deal directly with the person paying, and take the risk of them ripping you off, or go through an exchange (and hope you can trust them) and your identity is known.
If governments got their act together, they would be passing legislation to ensure that such exchanges are well regulated, with requirements to properly identify users, and to make those identities known for law enforcement purposes, with a proper warrant. Encouraging established banks to operate bitcoin exchanges, for example, would reduce the need for in-person cash transactions, and then I'd really have no problem with such in-person transactions being outlawed. That would help put the pinch on cyber-criminals who use Bitcoin as a means for extorting money from people as well, as it would make laundering it potentially that much more difficult.
Remortgaging your house is also a much less useful tool for criminals laundering money. That documentation is required by law to prevent vast sums of money moving through the system from organised crime. See also: "unexplained wealth orders", and the wives of jailed Azerbaijani bankers who can't explain how they finance their shopping sprees in Harrods.
"Not only the things can be tracked, they can also be taxed"
Yes and no. All the transactions are publically available on the blockchain, but what is really known is that wallet ABC made an income of x bitcoins. AFAIK, the identity of the owner of the wallet is private.
Probably there are some ways depending on the wallet setup for governments to get identity data or infer it from exchanges if the bitcoin is cashed out into the traditional banking system. However governments in western democracies aren't usually allowed fishing expeditions, they would nee dto have specific suspicious evidence to obtain a warrant for specific data from the intermediaries.
Othewise, again as I'm aware, bitcoin exchanges are not currently required to do the same level of 'know your client' due diligence on their account holders as a noral bank
I was just thinking of that, the Tulip market thing a couple of centuris (or so) ago.
Also demonstrated in fiction, in the 2nd season of 'Spice and Wolf' (pyrite market manipulation)
Still I have some Schadenfreude for the hedge-funders, one in particular [and no news whether or not this person, "the man who broke the bank of England", lost any significant money in this, but he probably DID].
Normal stock investors are long term, and a rising tide lifts all boats. The hedge-funders are basically selling SNAKE OIL and making money at the expense of others. Like I said: Schadenfreude.
Again, NO, Soros is not some deep state operative funding left-wing fanatics who want to turn you into communists.
Always with the right wing and their projection: Oil/Gas/Pharma/Health insurance/military contractors are the ones corrupting america, not the people who want to give you healthcare.
get a grip. You're 60-61 years old. You should know better.
No. The fact is that this is two groups of speculators fighting each other. The hedge funds were betting that GameStop would, essentially, go bankrupt. The Redditors were betting that if the price went up the hedge funds would start buying shares back to reduce their positions, i.e. to hedge their bets, and driving the price up more. The Redditors turned out to be right. They could just as easily have been wrong.
If you haven't seen it, watch Trading Places which is about speculation in the commodities market (and is also extremely funny).
Two last points. First, Elon jumped in because he hates hedge funds which for a time were heavily betting against Tesla.
Second, what ever you are investing in, you need to know when to Take the Money and Run (another very funny film).
Walks like pump-and-dump, quacks like one...
There are many stars that did try to play that game with options and in fact lost everything. The fun thing is that when buying regular stocks you can only lose all of your investment. With options you can lose more than you invested. There is a rather direct relationship between possible gains and risk, the likelihood to really lose big time. This is not always entirely true, like those investing into, let's say Greek or Cypriotic, banks before 2008, which came with potential high gains but was in fact a risky investment... but I disgress and I am terribly sorry for opening that can of wriggly things.
You can buy $10K worth of options to buy share X at a certain price in the future. If share X goes above that price, you would exercise the option and take the profit. If it doesn't go above the exercise price, you wouldn't exercise the option and you lose your $10K. Your loses aren't limitless, they are limited to the amount you bought of the option.
No. If you buy a *future* you are required to buy at the strike price. An option is optional, you don't need to buy. They are more expensive than futures for that reason.
*Selling* an option is a different matter, because you don't have the option, the person you sold it to does.
Options to buy are safe - you can only lose what it cost you to buy the option.
Simple options to sell are also safe enough: if you own share S and sell someone the option to buy your shares on a particular day at a particular price, you are limited to losing your share for a lower price than you could have got on the market.
What is dangerous is selling someone the option to buy share S at price P on day D without actually owning the share. There is nothing stopping you doing that, and if the buyer doesn't exercise the option, all is fine. But if they do exercise the option then you need to buy the shares from someone in order to sell them. That is what can lead to an unbounded loss, as you have to buy the shares at whatever price they happen to be at the time..
None of these is safe. Equally. Options are not safe investment instruments.
Let's say you have $1000. You can buy stock, call it XYZ. After a month it may appreciate - your investment paid off. Or the price may fall, say, by 5%. You lost 5% of your investment - you are down 50 bucks. Damn.
Or you can use your $1000 to buy a call option to buy XYZ at its current price in a month's time (just an example). This is a way to leverage your $1000 to control many more XYZ shares (options are, of course, cheaper than the underlying stock). If the share price goes up you will borrow money to buy the stock, sell he stock at a profit, return the loan - thanks to the leverage you'll earn a lot more than if you bought the shares. But if the stock goes 5% down you lose a thousand bucks, not 50. Not safe. You hope for a higher reward, but you take on a much higher risk - that's the general rule.
That's not how options are used. The real use case is not investment but hedging. Buy XYZ shares and in addition buy put options to sell at the current price (again, an example). If the stock goes up - you win (minus what you paid for the puts). If the stock goes down, you still sell at the original price and the only thing you lose is what you paid for the option (a small part of the original investment - basically, insurance against adverse market movements).
Short-selling hedge funds (if they are worthy of the name) could cover their bearish bets with call options (to buy at a specified price). I have no idea if they actually did, but that's on them.
Safe(ish) as in the worst that can happen is that you never see your money again. Though the risk of that happening is far higher than with other investments.
Selling a call option is especially dangerous, because you could be obliged to buy the shares at whatever price they happen to be at the time, and the sky is not the limit for that.
The risk to hedge funds using call options to cover their losses is counterparty risk - that the person who sold them the call option can't afford to buy the shares needed to close the option, and goes bankrupt. In a situation like this, that is a very real risk.
If you want to get even more complicated on investing and "insurance" on investments, then there's credit default swaps. I worked for a company that dealt with securities information about these 10+ years ago. My boss at the time and I were betting they would be the next big scandal/crash (still surprised it hasn't happened yet).
Unfortunately, I don't remember many of the details of CDS any more...
Credit Default Swap:
You pay some money. If a default event happens at a particular company during the period of the contract, they run an auction for the debt of that company. They then pay you the difference between £10m (or whatever) and the price obtained at auction for £10m (or whatever, same as previous number) of debt for that company.
Like an insurance policy, but claims are dealt with much quicker, and you don't need to prove that you actually suffered a loss from the default event in order to make a claim.
Suppose you were owed money by Debenhams who went bust recently. If you had a credit default swap for the balance of the loan, you would put your debt into the auction, and you would receive full payment for the loan from a combination of the auction proceeds and the swap payout.
Suppose you weren't owed money by Debenhams. You could still buy a credit default swap and receive a payout even though you hadn't lost any money from their bankruptcy. That's the difference between a credit default swap and a credit insurance policy.
Another difference is that you can sell your swap to someone else, and if Debenham's credit rating had dropped from when you bought it, you could make a profit on that sale.
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Yes, you can lose more money than you invested. If you sell options, you can lose a hell of a lot like the people that have shorted GameStop. For example, if you sold a call option on Gamestop @ $4 a share (because you believed it fall), and the stock rockets to $500 by the time of the option expiration date, you are obliged to buy shares at $500 each and sell them to the option holder at $4 each. Each option makes you responsible for 100 shares. Let the math sink in. The same works in reverse for selling put options. You can lose everything. Selling options is not for the faint of heart, or the inexperienced trader. You are thinking of buying options, which limits your risk to losing everything you invested in the option, ie. it expires worthless.
Your description is right, but even in your case you have not invested anything at t=0 (just got paid for the option you wrote). Then you have to buy the stock from the option holder, which is your only "investment", and even then it's not a 100% loss - the stock is worth something, albeit not as much as you paid for it.
Usually you own the stock you write a call on, so you won't even have to buy it at an inflated price at option exercise. What you lose in that case is the so-called "opportunity cost" - you lost the chance to sell the stock you own at the inflated price. But that is not your initial investment.
Yes, I agree all the hallmarks of the pump and dump.
Only if the author is correct, they didn't buy the shares but options.
Its an all or nothing bet.
You spend 10K on an options bet, if you don't exercise the option when it expires, they expire worthless.
There are a couple of problems.
If the SEC reviews, they could say that these people worked in concert and go after them.
The other problem...
The share price is influenced based on the options price.
So what happens when they start to exercise the options?
What goes up, must come down.
I'm not sure this is the same as a pump and dump at all. I think it's been identified (someone please say I'm wrong if this is the case) that certain Hedge Funds are hugely overexposed to their own short options, like I think I saw the number that 140% of the entire float of GME shares is in short options. That's right, there are apparently substantially more shares being shorted than actually exist!
By my limited understanding the big funds are obliged to have to buy the stocks on expiration of their options, so there's every chance that the price will continue to increase and the hedge funds loose billions more by being forced into buying at super inflated prices - which continues to drive the price further up. It's not like loosing an investment, this is like turbo-charged hyper loosing. Obviously I'd love to be sympathetic etc. A big bluff is being called by lots of people with relatively low risk individual stakes. It's hilarious.
Just to be clear - I have no financial position on GME (or anything else). I think the phrase is "we. just. love. the. stock"
You hit the nail on the head,
A short contract obliges you to return the borrowed shares on a specific date.
If you do not you get thrown off the exchange and can never trade again.
This is the magic of the current situation -- the hedge funds have to buy the shares.
As long as most hedge funds keep making bigger bets to try to cover their losses the share price will go up. So its a question of which fund loses their nerve or goes bankrupt first. The last hedge fund standing will clean up.
As long as most hedge funds keep making bigger bets to try to cover their losses the share price will go up. So its a question of which fund loses their nerve or goes bankrupt first. The last hedge fund standing will clean up ..... James Anderson
Oh? Are you really so certain, JA? The last hedge fund standing dealing in the trade is paying a king's ransom fortune to return a ponzi zombie dead man walking stock which it never ever owned in the first instance.
Not the smartest and shrewdest of moves, methinks, however a great way to lose stashes of other folks money and shred to tiny pieces all of your own carefully conceived and conserved credibility.
.... Sort of. It was mentioned in the movie, but the stocks got dismissed as they didn't think they could run a stock play against a banker.
The big con in that movie was getting a gangster to bet a huge amount of money on a horse that they already know is going to lose as opposed to win.
Yeah, that's what happened the last two days.
And that's precisely the trouble for small investors in a scam like this: they never know when to bail. Everyone knows that it's going to be necessary sooner or later, but nobody wants to sell too early because greed. And by the time they realise they've missed the boat - they've missed the boat.
MOST of the small investors in this case are accepting they're going to lose everything when the stock inevitably tanks - BUT (and here's the thing) their individual exposure is small and when the shorts come due the hedge funds will have to buy what's available at whaeever price it's selling for at the time - meaning they might be approached to sell what they hold ffor whatever figure they care to name if there's a shortfall of actyal share numbers on the trading floor (this is unlikely to happen)
As long as people don't lose their nerve or attempt to cash out, the tanking only happens _after_ the shorts come due and hedge funds get wiped out.
The current high value is purely illusory because as soon as people start cashing out the stock will tank. As long as you accept that, and you bought low you can set a few hedge funds on fire for a low overall cost when the $70 (or less) stock drops to $5 from $700-$2400. Only a couple of greedy people can cash out and in all liklihood they eneterd the game late/paid high anyway.
It's illegal when I do it. What appears to have made this all worse is that the big hedgies - who mostly haven't been performing anywhere near well enough to justify their 2 and 20 fees ...
Naked shorted the stock - and a few others. If what I see in reports is the case, more than 100% of the float in this stock was sold short.
Illegal if I do it....shares not borrowed at all, just made up out of thin air and sold by hedgies.
You can do that when no one looks at the bits or demands even paper records. Faking is easy.
OF course, those guys are well connected, since the people they manage money for are politicians and rich folk.
So they had to call a halt on the poor doing to the rich what the rich have been doing to the poor all along.
@Christopher Reeve's Horse: you are right in that the big problem here is liquidity. That problem would probably glare without Reddit: at some point the short-sellers would want to buy shares to return the loan (they borrowed shares and sold them on the market, now they hope to buy them back cheaply and return to the real owners), but there may not be enough shares to buy - a "liquidity hole".
2 nitpicks: options are not involved - shares are borrowed, and the liquidity hole is not exceeding the number of shares in existence but the number of shares traded on the market (the article has it right). The principle remains.
I can't help but wonder if any of the short-sellers has the pockets and the nerve to sit this whole thing out to the crush and walk away with a nice profit and a smug face.
"I can't help but wonder if any of the short-sellers has the pockets and the nerve to sit this whole thing out to the crush and walk away with a nice profit and a smug face."
They could - IF they have unlmited borrowing time. If they don't, then they have to return the stock at the agreed time - and the fact that they have to go out in an overheated market to obtain those shares will momentarily drive the price to astronomical levels (which the hedge funds will have to pay) before the stock inevitably tanks
It gets even worse for the hedge fund if the shares aren't available to buy on the trading floor because it means they have to approach individual investors and buy at an agreed price
Personally if I was playing this game I'd set an automated sell at 4-5 times the current high figure, because when the return comes due, the hedge funds are going to be desperate
"Technically it's an abusive squeeze"
Naked shorting is illegal too, but the hedge funds have found a figleaf workaround
This isn't an organised squeeze or pumpn'ndump and in order to be absolutely covered all the the movers'n'shakers is ensure they're not going to financially benefit from setting a few hedges on fire (ie, by NOT buying gameshop stock, merely commenting on it and pointing out the figleaf shorting)
This isn't pump and dump
The redditers involved KNOW they're likely to lose 100% when the stock inevitably tanks and have been saying so up front
This is about burning down the hedge funds via their figleaf shorting exposures
Najed shorting was criminalised worldwide a while back because it's outright market manipulation, but the HFs n question have been exploiting loopholes ("Borrowing shares" - an interesting way to describe selling shares you don't own) to carry on with the abuse.
I suspect that when the dust settled this sidestepping of the ban will be illegal too
As a side thought, anyone who "borrows" shares to short them exposes themselves badly if the shareholder they "borrow" from buys the shorted shares on the open market at less than the "value at borrow + fees" marker. Expecially if the shareholder in question can mop up enough liquidity of the shorted shares to force the share price high when the time comes to return the borrowed shares
I can see several HFs under new ownership shortly and a bunch of chronic gambling addicts looking for jobs outside of the sharemarketing industry