The GameStop Frenzy — a crowd torched the shorts, then bought the top

In late January 2021, shares of GameStop — a struggling American video-game retailer that began the month near $17 — spiked to an intraday high of $483 on 28 January before collapsing by roughly ninety percent within weeks. The surge was organized largely on the Reddit forum r/wallstreetbets, where retail traders had spotted that hedge funds had sold short more shares than the company even had freely trading, and set out to force those bets into ruinous reverse. For a few days the plan worked spectacularly; then the price came down almost as fast as it had gone up.

The episode was two things at once, and the confusion between them is the heart of the case. It was a genuine short squeeze with real market mechanics: with short interest reported at roughly 140 percent of the public float, every dollar the price rose forced bearish funds to buy shares to limit their losses, which pushed the price higher still. Melvin Capital, one of the largest shorts, lost so heavily that it took a $2.75 billion cash infusion — $2 billion from Citadel and $750 million from Point72 — on 25 January, and shut down entirely the following year. But the squeeze was also a social-media euphoria in which a far larger crowd, drawn by viral posts, defiance of Wall Street, and the dream of life-changing gains, bought a near-worthless business at a price no fundamental analysis could justify.

The two stories had different endings. The squeeze itself was a finite, mechanical event: once the trapped shorts had mostly covered, the engine that drove the rocket was spent. The euphoria lasted longer and cost more, because the people who arrived late — many buying on 27 and 28 January at prices above $300 — were not squeezing anyone. They were the greater fools of a classic bubble, holding an asset whose price depended entirely on the next buyer paying more. When the brokerage Robinhood and others abruptly restricted buying on 28 January, the inflow stalled, and the price fell from $483 toward $40 over the following weeks.

The aftermath reshaped both regulation and folklore. A congressional hearing in February 2021 put a Reddit trader, a Citadel founder, and Robinhood’s chief executive at the same virtual table. An SEC staff report that October concluded, contentiously, that sustained positive sentiment rather than the buying-to-cover of trapped shorts kept the price elevated for weeks — a finding that, if correct, makes the later phase less a squeeze than a self-reinforcing crowd. Either way, GameStop became the founding myth of the “meme stock,” a template for collective speculation that has recurred since.