There are 100 cows. A hedge-fund believes that the milk consumption will go to zero, so they borrow the 100 cows for one month and sell them for $1 each. Then they borrow them again, and sell them once more for 90c. Certain that they will worth $0 at the end of the month A Redditor notices this. She knows that in a month's time, the hedge-fund will have to buy 200 cows, and there are only 100 available. Her plan is s…
This is a common misconception, but fundamentally wrong. Every short sell has an equal but opposite buy. Therefore every share shorted creates a new synthetic long share. Alice owns 100 shares. Bob borrows 100 shares from Alice, then short sells them to Chuck. There are now 200 shares long available to buy back- 100 owned by Alice and 100 by Chuck.
Therefore it's easily possible for short interest to be well over 100% of the float. There's no upper limit, it could literally be 10,000% of float. Shares sold short, can then be re-borrowed for new short sellers in an arbitrarily long chain. It's the same way that fractional reserve banking creates money out of thin air. It starts with a small set of "hard assets", then lends, say 90%, of them out to other banks. Those banks then lend out 90% to other banks. And so on, until the system has 10 times the money supply it started with.
Now, the reason that high short interest may result in a short squeeze is because usually some percent of longs at any given time tend to be long-term investors who are unlikely to sell. If, say 66% of investors are long-term holders, then short-interest above 50% could create a squeeze. If float's a million shares, then they'll be 1.5 million shares long and 500 thousand shares held short. But 1 million of those shares will be held by long-term investors. Therefore there won't be enough immediate buyers if all 500 thousand short sellers liquidate in a short period.
But... With Gamestop this logic makes no sense. At $300 per share, no one is a long-term investor. Nobody is buying or even holding at that price because they think the company is worth $10 billion (more than five times higher than its 2007 peak). Since there are always more shares held long than short, and since every share held long is held in anticipation of a short squeeze event, then even in the event of a massive unwind there will still be more sellers than buyers, and the price will fall, not rise. In fact during this whole price runup, short interest has actually increased. So clearly it's not short squeeze driving the melt-up.
The only reason Gamestop is going up is because of Tulip-mania. It's a classic bubble. Some early people on the hype train reaped eye-popping gains as more jumped on and bid up the price. That attracted even more attention, more buyers, and higher price. Like any classic bubble it requires an ever-widening net of greedy but foolish patsies to jump in at the bottom of the pyramid.
