DeepF**kingValue
The story of a Reddit user who has kicked off a revolution in the financial world.
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This is the story of a Reddit user who has kicked off a revolution in the financial world and brought multibillion-dollar hedge funds onto their knees.
In 2012, a 30-year-old Reddit user named Jaime Rogozinski made a subreddit around investing and called it wallstreetbets. It didn’t gain much traction in the initial years. Back in those times, trading wasn’t for everyone. Stockbroking firms were collecting high commissions and they weren’t meant for an average individual investor. So the subreddit wasn’t famous among the general public.
Fast forward 2019, some brokerage firms have eliminated trading commissions i.e you can buy a stock without giving the platform any commission. This paved way for millions of average individual investors to start investing in the stock market. The stock markets are for everyone and not just the rich now. Now that everyone’s got a chance to invest in stocks, the subreddit r/wallstreetbets blew up. Jaime was concerned. At the same time, another member of the forum by the name of DeepFuckingValue (Keith Gill) has been studying something that he’d noticed.
GameStop Corp. is an American video game and consumer electronics retailer. It is the world’s largest video game retailer, operating 5,500 retail stores throughout the world. It hasn’t been performing well because everything’s digital now and people hardly go to the store to buy a game. They prefer buying a digital version of the game instead of a CD. It was 5 months ago when Kieth started studying the financials of GameStop deeply. With new gaming consoles PS5 and Xbox about to launch, he felt, with proper management, GameStop can be back in business and make money. He felt GameStop was undervalued. He felt there was a lot of demand for physical games in many countries which meant more revenue for GameStop. He was diligent and left no stone unturned to prove his case - GameStop isn’t undervalued. He’s been documenting all his progress on his YouTube channel. He invested $53,000 into GameStop in September hoping that GameStop wouldn’t go bankrupt. Several Redditors also agreed with Kieth.
But then they noticed something peculiar. 84% of the GameStop stock was held as short positions, i.e betting that the price will fall. This is highly unusual. It turned out that hedge funds have colluded in selling the stock publicly stating that the price would go down, therefore, making millions. They sold over 130% of the short stock at this moment. With this, Redditors found a unique opportunity. To understand this further, we need to know what short selling is.
Say you’ve borrowed some Pokemon cards from your friend which are worth $100. But you’ve promised to return them next week. You sell those cards for $100 to a dealer expecting the price of the cards to drop. Say the price drops to $50 in the same week. You now buy the cards back from the dealer again for $50 and return them to your friend. Let’s talk about the number now. You’ve sold the cards (which you don’t own) for $100 and bought them back at $50. You’ve made a profit of $50 (and you pay interest from your friend for borrowing his cards) from something that you don’t own! When you do the same with stock, this is called shorting the stock. Here's a clincher - If the price of the cards increases to $150 instead of falling, and you need to return those cards to your friend, you pay $150 to buy back those cards and return them to your friend. You’ve lost $50 now. When this happens on a large scale, it is known as the short squeeze. Because of this, the losses are almost limitless. This scenario is what happened to these hedge funds. Hedge funds borrowed the stock expecting the price to fall. Here’s billionaire investor Chamath explaining (a twitter thread).
These hedge funds were waiting for GameStop to go bankrupt to maximize their profits from the short positions. The Reddit army realized that if they start buying the GameStop stock, its price will increase and the hedge funds have to pay way more than they have bought or. These Redditors were pushing this to an extent that the hedge fund had to file bankruptcy. This was a form of a digital protest that the masses were playing the banks and hedge funds' own game against them. By 28th January, these hedge funds have lost over $70 billion. It was an all-out war. People went all in and started buying billboards to spread the word. “Buy GameStop stock” was the motto of the people. Do. Not. Sell. This means there’s going to be even more losses for the hedge funds. Potentially in billions. Some other big companies have joined these Redditors (only to book a profit). Eight other Wall Street titans have made around $16 billion taking advantage of the situation.
Meanwhile, many big names are following along. Chamath Palihapitiya, a venture capitalist and the founder of VC firm Social Capital, tweeted that he was buying GameStop calls. And Tesla’s Elon Musk, whose tweets often move stocks, tweeted, “Gamestonk!!” with a link to r/WallStreetBets.
Other Redditors have realized that many other companies were in a similar situation and their stocks were heavily shorted. These included Nokia, Blackberry, and AMC and it seemed to be working. The biggest shareholders of GameStop have amassed $2 billion in wealth and many other small traders were able to pay off their college loans and give back to society (r/wsbgivesback). Kieth Gill who has only invested around $50,000 back in 2019, had now made a fortune of 43 million dollars! His bet was right. But it wouldn’t be smooth sailing for him and many others.
Discord cut the communications between the Redditors citing hate speech. Facebook banned the Robinhood traders group which had over 150k people. Robinhood platform has stopped its users from buying any more stocks of GameStop, Nokia, and AMC. They could only sell them now. These actions have added more fuel to the fire. By then people were well aware of the situation and multiple lawsuits were filed against these companies. Not letting people buy stock and only sell then will drive the stock price down artificially (which is indeed market manipulation), which is exactly what these hedge funds wanted to survive this crisis.
As February rolled around, the sentiment changed and the GameStop price began to drop, and fear spread throughout the Reddit message boards. Some users had lost hundreds of thousands and some millions. We need to commend these Redditors for doing what they did. But many have broken the number one rule of investing - only invest what you’re willing to lose. Many invested their savings into the market considering this as a good cause (this was a protest).
The GameStop rebellion has set a precedent. This was the very first instance of the intersection between social media and the financial system. The idea has gone global. There were many similar incidents reported around the world. This has revealed how volatile and detached from reality stocks can be these days. January of 2021 marked a cultural shift in the way that a financial market is viewed. People are once again talking about the unfairness of the financial system. This story will be taught in business schools around the world. And this the story of how ONE guy on Reddit started a financial revolution. A story that’s still unfolding.
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Bonus:
The story of deepfuckingvalue. The man behind everything. Click here.
An explainer video. Click here.
An even better explainer video 😉.
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