No. You aren't misunderstanding anything. That's exactly what happened.

The "problem" here, is that the little guys noticed. Michael Burry and some unknown YouTuber saw this over a year ago and started buying GameStop, and making a case for people to buy GameStop.

This is very easy to understand. The wrong people are losing money. And that can't be allowed. That's all you need to know for this to make sense.

I'm not an expert but it seems to me that this whole 100% thing is a total red herring. If I (A) have 50 shares in GME, I let you (B) borrow them and short sell them to person (C), person (C) now owns them, you (B) can borrow them from person (C) and short sell them to person (D). Suddenly you've short sold the same stock twice.The only issue for you is that you now need to buy back 100 stock to pay off what you've borrowed, which you could do buying the stock from person (D), giving it back to person (C), buying them frmo person (C) and giving it back to person (A).

The only issue comes if someone notices that you've done this, pushes the price up to the point where you have to exit your position because your broker won't let you hold this short position that you can't afford to pay for. At that point you must exit, which drives the price up even further because you're creating demand for the stock.

What's important to notice about this is that the second you're no longer short the stock, no one has any incentive to hold the stock. So it'll return to $20 and all those super smart boys on WSB who were holding out for $2000 have thousands of shares of a worthless retail stock that they probably bought on margin and are going to lose everything.

Yes. When the dust settles there are still 70M almost worthless original shares that will be held by someone.

But in the meantime, there are 70M short shares that need to be rebought from the 140M original+loaned shares. The idea is that forcing closing out the short position will allow you to sell some at sky high prices, hopefully enough to cover the loss from the rest of the shares that must be inevitably bagheld.

100% of float or 100% of outstanding are not super significant inflection points, just very large ratios.

Not necessarily. Those shorts exist for a reason: someone thought that gamestop was a bad company. If they are right then the short position won't need to be bought back because at some point the bankruptcy court will decide that the share holders get nothing. At this point all trades on the stock are legally halted and so the IOUs are legally meaningless - anyone who owned stock gets nothing.

Of course the above depends on the short holders to: be right; have the capital to not have to cover their shorts; and be willing to hold on for the ride. I'm not making bets on any of the above.

Hi everyone, thank you for joining our Gamestop company all hands, I'd like to introduce our new CEO and majority shareholder, soon-to-be bankrupt guy from reddit.

People conspiring to push prices in one direction is a clear cut market manipulation and I believe a criminal offence in most jurisdictions.

It's fine to have lots of people buying something, but if they discuss how they can coordinate to hurt short sellers or something like that, particularly on a public forum, despite not being a lawyer I am fairly confident this is prosecutable.

Market trading regulations are full of fine lines where the wrong side can land you in jail. For instance the difference between front-running and pre-hedging / anticipating market liquidity is basically the intent and the information the trader has. The actions are indistinguishable.