If there was ever a minute for decentralized finance to throw open the doors and shout “here we are,” this is it.
Accusing crypto-friendly stock trading app
Sheriff of Nottingham Robinhood of illegally shutting down trading on skyrocketing GameStop and a dozen other companies, Quantum Economics founder Mati Greenspan wrote on Jan. 29 that Reddit’s r/WallStreetBets community “broke the internet.” He added:
“It’s clear at this time that the events of the last 48 hours have provided an obvious catalyst for bitcoin and crypto adoption.”
“This was a shot across the bow for institutional investors everywhere,” said Peter Smith, cofounder and CEO of the decade-old cryptocurrency exchange Blockchain.com. “There’s incredible power in decentralized groups of individuals and the future of finance will be built less like Wall Street and more like the internet: by a decentralized group of individuals.”
Robinhood channels the Sheriff
Robinhood threw GameSpot buyers and its reputation under the bus on Jan. 28, acquiescing to heavy pressure from mainstream financial firms by choking off its customers ability to buy shares in GameSpot, which had skyrocketed 1,750% over the last few days, as the small retail traders who haunt Reddit’s r/WallStreetBets subreddit pumped the gaming retailer’s stock. It went from a market cap of $650 million in late 2020 (after a big stock price rally) to almost $28 billion at the dawn of Jan. 28.
The WallStreetBets subreddit started its fight, in no small part, to stick it to the giant hedge funds that had shorted the stock—that is, bet its price would fall. And stick it they did. Hedge funds like Citadel Securities and Melvin Securities faced losses in the billions.
Unfortunately, Robinhood—which pitches itself as a champion of the little guy that aims to “democratize finance for all”—came under enormous pressure from Wall Street giants like… Citadel Securities, which is Robinhood’s biggest customer.
That’s when Robinhood threw in the towel. Robinhood was not alone, however. TD Ameritrade, E-Trade and others quickly followed suit, making it very difficult for retail buyers to buy GameSpot’s GME stock. Of course, it quickly tanked, dropping from nearly $470 to $132 in an hour and a half—and throwing the short-sellers a lifeline.
It proved to be a short-lived one, as GME stormed back, jumping almost $150 to $345 while the markets were closed overnight. At press time, it’s at $325.
Meanwhile, Robinhood CEO Vlad Tenev ended up on CNN answering questions like: “This looks like a move by an outfit called Robinhood, which is supposed to be taking from the rich and giving to the poor, and doing exactly the opposite. That when the big guys, including one of your main investors in your company started to lose, you shut down the game to starve the little guy. Fair criticism?”
Citadel, of course, denied being behind the move.
To be fair, it’s worth noting that GameSpot is a horrible investment, with sales off $1.8 billion from 2019 to 2020, and no real turnaround in sight as the problem is a fundamental one: why go to the mall to buy a video game when you can easily download it?
To be even fairer, it must be noted that investors still have faith in Robinhood, which was able to raise $1 billion overnight to deal with the fallout of the GameStop trading frenzy—which the New York Times reported forced the buying cutoff. The fundraising, the Times said, was necessary not to save Citadel, but because all of the GME buys “put a strain on Robinhood, which has to pay customers who are owed money from trades while posting additional cash to its clearing facility to insulate its trading partners from potential losses.”
Long fond of Robinhood for its embrace of trading cryptocurrencies, the broader crypto industry quickly joined in the outrage. Among them was attorney Jake Chervinsky, general counsel of Compound, a decentralized lending protocol.
“Shutting down trading to allow someone to cover a short position totally and completely breaks the integrity of the markets,” added Watchdog Capital’s Bruce Fenton on Twitter. “Re-opening after the fix is in isn’t a solution. The integrity of an unfair market never recovers. The natural course of history and markets is impeded.”
But beyond the outrage, the industry saw a golden moment for both censorship-resistant cryptocurrencies and especially for uncontrollable decentralized finance.
Calling the GameStop uproar “a shot across the bow for institutional investors everywhere,” Peter Smith, cofounder and CEO of the decade-old cryptocurrency exchange Blockchain.com, said, “[t]here’s incredible power in decentralized groups of individuals and the future of finance will be built less like Wall Street and more like the internet: by a decentralized group of individuals.” He added:
“My thoughts and prayers are with the many institutions that will learn this lesson the hard way.”
The Gemini exchange’s Winklevoss twins were quick to point that out on Jan. 28, with CEO Tyler tweeting, “Remember when de-platforming was shocking news? Now it’s just business as usual. This will be DeFi’s greatest catalyst.”
Gemini President Cameron chimed in with: “The pandemic made people appreciate #Bitcoin as an inflation hedge. The de-platforming of Wall Street Bets is making everyone appreciate it’s censorship resistance.”
Another crypto insider pointing to DeFi as a solution for the GameStop situation is Jake Yocom-Piatt, co-founder and project lead at Decred.org, which is behind the decred (DCR) cryptocurrency, which bounced from under $12 at the beginning of November to $66 at press time. He told Modern Consensus via email:
“The GameStop situation specifically is a golden opportunity for decentralized exchanges and the wider crypto space to advance its cause/value in creating a fairer financial system that levels the playing field.”
In October, the organization launched DCRDEX, a decentralized, fee-free cryptocurrency exchange that never takes custody of customers’ funds and allows completely permissionless transactions to afford privacy.
“Decentralized exchanges like DCRDEX enable people to trade with minimal friction, risk and centralization,” Yocom-Piatt said on Jan. 29. “Decred and other cryptocurrencies level the playing field in an otherwise rigged financial system that is set up to benefit those at the top.”
Really, that applies to the broader blockchain and cryptocurrency industry, Bitfinex exchange CTO Paolo Ardoino claimed.
“As advocates for retail investors rail against the current structure and practices of financial markets, it is important to note that much of the work being done in the blockchain space has been inspired by these barriers,” he said. Ardoino added:
“Removing obstacles to normal, everyday working people that are building and seeking wealth growing opportunities has always been part of the ethos of crypto.”