The overextended stock market bubble was already close to bursting, but some recent turmoil involving skyrocketing GameStop shares and a Reddit-driven short squeeze might break the already thin ice. If this happens, and the stock market turns down in a big way while Bitcoin is on critical support, there could be another sharp plunge across the greater market.
GameStop: The Short Squeeze That Rocked The Stock Market
Legacy markets are in an uproar today, following the ongoing epic short squeeze in GME shares. Melvin Capital, a large hedge fund, opened a sizable short position against the aging video game retailer. Users of the WallStreetBets sub-reddit instead bought up shares, driving up prices and causing one of the largest short squeezes on record.
Losses are said to have reached in the billions, while GME shares have risen from a 2021 open of under $20 to just under $350 at the time of this writing. Losses are said to have reached the billions. Meanwhile, those involved in the plan have shared screenshots proving they’ve turned $50,000 positions into upwards of $20 million.
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GameStop shares being this overvalued is a sign that the current bubble and market exuberance is spiraling out of control, and its causing overall market sentiment to shift.
If legacy markets like stocks begin to turn, all while Bitcoin is on the ropes at $30,000, it could lead the crypto market into a much deeper plunge.
Legacy Markets Turning Down Could Take Bitcoin Down With It
The same panic isn’t in the air as the last time the stock market took down Bitcoin but the risk remains high of the prior correlation returning. After Black Thursday, stocks and crypto entered a bull market despite the state of the economy.
From the lows set that day, Bitcoin climbed 1000% from $3,800 to over $42,000, and major US stock indices all set new all-time highs and then some.
But with exuberance reaching levels of insanity, negativity surrounding the recent situation beginning to shift sentiment, and with both crypto and legacy markets on thin ice, a much deeper selloff could ensue.
What investors and traders will need to figure out from there, is if it is an opportunity to get into position lower in preparation for another leg up, or if the bubble has popped and the upside is over for some time.
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Markets are indeed irrational currently, but according to famed economist John Maynard Keynes, “markets can stay irrational longer than you can remain solvent.”
Melvin Capital learned this the hard way, and if markets turn down from here, others will too.
Featured image from Deposit Photos, Charts from TradingView.com