In the latest development of the David and Goliath GameStop story that has captivated retail traders everywhere, hedge fund Melvin Capital has reported massive losses for January.
In the culminating loss of billions for hedge funds and their managers, it appears that Redditors at WallStreetBets have pulled off the impossible. The Wall Street Journal (WSJ) reports that Melvin Capital, one of the largest firms behind the aggressive GME shorts, has lost 53% of its investments in January.
Hedge funds have been shorting GameStop (GME) stock with more shares than what is available. This means they were artificially pushing down the price beyond regular market conditions. This subsequently created a massive short squeeze opportunity.
GameStop: Visible Wounds From a Digital Revolution
Melvin Capital wasn’t the only hedge fund to feel the burn. Other firms like Citadel and Point72 also suffered heavy losses. Redditors clearly targeted Melvin with this financial play. According to the WSJ, one Redditor exclaimed that there was “only 47% left to go.”
This massive market movement led to decisive action by hedge funds and trading applications, which shut down the ability to buy GME stock. This presented a conflict of interest, naturally favoring short players.
American politicians from both sides of the political spectrum have voiced their concerns at the blatant alleged market manipulation. Many in the blockchain and Decentralized Finance (DeFi) space have renewed calls for decentralized and permissionless infrastructure.
How Blockchain Can Prevent This
One of the main goals of blockchain technology is to create an inclusive, censorship-resistant platform that cannot be abused. After widespread outrage on the incident, many claim that decentralization is the key to future fair markets.
Asset tokenization has not yet been widely adopted for securities with a greater focus on non-fungible tokens (NFTs). But developers are building out new networks, moving closer to mainstream adoption every day.
Blockchain platforms are still slow compared to their traditional counterparts. They need significant throughput upgrades. This is necessary to handle the number of transactions currently seen on the stock market. The innovation is coming, and the groundwork is there.
Melvin Capital and other similar firms may have limited power in future blockchain trading networks.