GameStop Stock Plummets 25% After Bitcoin Treasury Announcement

GameStop (GME) experienced a significant 25% decline in its stock price following a 16% rally on March 26. The sudden downturn was triggered by the company's decision to establish a Bitcoin treasury, a move that initially sparked investor optimism but quickly led to heavy selling pressure. The announcement was seen as a bullish signal, drawing parallels to MicroStrategy's past Bitcoin acquisitions. However, the market's reaction was swift and severe, erasing nearly $3 billion in market value.

Analyst Han Akamatsu offered an explanation for the stock's decline, drawing parallels to MicroStrategy's past financing methods. He noted that when MicroStrategy issued convertible notes, institutional buyers used a strategy known as convertible arbitrage. This involved buying the bonds, shorting the stock to hedge, and waiting for the bond to either convert or mature. Akamatsu suggested that this process created artificial short pressure on the stock, despite MicroStrategy's bullish outlook on Bitcoin. He pointed out that a similar pattern is unfolding with GameStop, where the company is issuing $1.3 billion in 0% convertibles, likely to buy Bitcoin, and institutions are shorting GME to hedge.

Akamatsu further explained that if GME or Bitcoin rises substantially, the short positions set up to hedge the convertibles could be unwound en masse, presenting a potential squeeze opportunity. He also noted that the volume-weighted average price (VWAP) would influence the conversion price, with institutions preferring a lower stock price to get a favorable conversion. The typical ratio of shorts involved in this strategy is 50–70% of the bond’s notional value in stock, allowing institutions to make money on the arbitrage between the bond conversion price and the stock price, even if the stock stays flat or drops.

Some market watchers have criticized GameStop’s board for incurring what appears to be self-inflicted selling pressure. One user questioned whether Chairman Ryan Cohen had miscalculated, suggesting that the hedge is supposed to mitigate risk but instead created more risk. Akamatsu stood by his analysis, asserting that the strategy is calculated and going according to plan. He drew comparisons to a setup he observed with Celsius Holdings, suggesting that a retracement might offer a buying opportunity. Akamatsu referenced chart analyst Thomas Bulkowski’s work on wedge patterns, hinting that a retracement could test the wedge again and then have a greater takeoff.

Akamatsu reassured traders not to panic if the stock dips further, stressing it could be a standard technical move. He concluded on a hopeful note, expressing optimism that the stock could skyrocket. At the time of reporting, GME stood at $22.30. The market's whiplash response to GameStop's Bitcoin play has prompted widespread debate, with some investors viewing it as a bullish signal and others expressing concern over the potential risks involved. The company has not fully detailed its strategy or timeline for Bitcoin acquisitions, leaving many questions unanswered.