They can profit without this sort of Ponzi scheme. The best analogy I have seen is as follows:
Suppose you have 5 phones on the market, and by law short sellers have to buy 10 phones. Since the demand will always be higher than supply ( the legal requirement forces short sellers to buy ), then the price will go off to infinity by natural supply/demand mechanics.
The only way to break this is by increasing supply, ie if long stock holders decide to sell they shares as you recommended when you say get out. This would not be maximally beneficial for the long holders. Once supply surpasses demand the overpricing immediately breaks, but that doesn’t need to happen. Since short sellers owe something like 120% of the stock ( I’m not sure of the exact value), long holders could theoretically agree to sell only 1% of their stock each at a million a share, and this would still work and benefit all long holders.
This was only possible because short sellers overbought their side. The interesting issue here is that even though there is a way for ALL long holders to profit immensely, it would fail if enough of them get scared into selling, so it becomes a real life coordination problem. Do you think they can pull it off?
PS: I’ve worked in finance and found this very interesting, both due to the unusual short squeeze it is, and to the behavioural side of the situation. I’d like to hear opposing thoughts and questions if my writing isn’t as clear as it should be. Exciting times!
They can profit without this sort of Ponzi scheme. The best analogy I have seen is as follows:
Suppose you have 5 phones on the market, and by law short sellers have to buy 10 phones. Since the demand will always be higher than supply ( the legal requirement forces short sellers to buy ), then the price will go off to infinity by natural supply/demand mechanics.
The only way to break this is by increasing supply, ie if long stock holders decide to sell they shares as you recommended when you say get out. This would not be maximally beneficial for the long holders. Once supply surpasses demand the overpricing immediately breaks, but that doesn’t need to happen. Since short sellers owe something like 120% of the stock ( I’m not sure of the exact value), long holders could theoretically agree to sell only 1% of their stock each at a million a share, and this would still work and benefit all long holders.
This was only possible because short sellers overbought their side. The interesting issue here is that even though there is a way for ALL long holders to profit immensely, it would fail if enough of them get scared into selling, so it becomes a real life coordination problem. Do you think they can pull it off?
PS: I’ve worked in finance and found this very interesting, both due to the unusual short squeeze it is, and to the behavioural side of the situation. I’d like to hear opposing thoughts and questions if my writing isn’t as clear as it should be. Exciting times!