How did one Reddit user influence the entire financial markets? About a month ago, a single Reddit user, /u/DeepFuckingValue, and his hypothesis took the world by storm. His quick hypothesis was that Gamestop a retail store that was forced to close during the pandemic was over shorted by hedge funds. What did this mean? Hedge funds sold more shares than were outstanding and at some point had to buy them back to return to the broker that they borrowed them from. This, in turn, would cause the price to jump as the number of shares they borrowed outnumbered the number of shares outstanding.
The Reddit user, also known as Keith Gill, was right. Gamestop shares jumped that third week of January to a high of nearly $500. Within hours, the talk of the world was about Gamestop with traders taking out a Times Square billboard, an airplane advertising banner, as well as thousands of dollars of merchandise. The trade is still not over, but how did one trader in his basement lead to this global movement?
1) Strategy: Reddit is sometimes overlooked by many as a form of social media. Like Twitter it has its own lingo and is usually more esoteric than simply @’s and #’s. This keeps the community relatively small as n00bs (meaning newbies) have a hard time catching up and understanding what is happening. Despite this, Reddit has global reach and influence divvied up by topic. The subreddit (the Reddit topic that was originally posted to) WallStreetBets grew its following three-fold following the media coverage.
Lesson: Do not underestimate the power of Reddit. While Facebook helps in building and reinforcing our own echo chambers and beliefs, having faces and names tied in helps in being realistic. Everyone you know believes the same things you do, but more likely than not it is the same few people that continuously reinforce your beliefs. On Reddit, hundreds if not thousands of anonymized people continue to influence and reinforce your beliefs (sometimes genuinely sometimes not).
2) Strategy: There is full transparency on WallStreetBets, with traders posting their gains and their losses. Gill’s gains kept growing and growing. His original 50,000 investment at one point became 46 million. Other traders took notice of “gain porn” and piled into the trade. Many traders were able to buy Gamestop stock for single to double digits because of Gill’s foresight. While we mention influencer FTC compliance regularly, it remains to be seen how or if the SEC will change their rules.
Lesson: It is hard to hide on the Internet. Transparency will eventually catch up to you. Gill and the WallStreetBets community revel in gains, but also revel in losses (loss porn). This transparency won the trust of the rest of the community. While Gill earned a lot from his trades, there were days when he lost a small fortune. This earned him the respect of the community. In creating your own campaigns, transparency is important. Be genuine and people that are affected by your message will find you.
3) Strategy: The more parabolic the chart for Gamestop became the more attention it received causing the chart to go even more parabolic. As Gamestop’s daily gains doubled, it made headlines. Finance outlets like CNBC were trying to make heads or tails of it and finally were able to trace it back to WallStreetBets and to Gill. This coverage though got more people onto Reddit and more people into the trade.
Lesson: It is hard to get media coverage, but once you have a platform, a position, a message, mainstream media is like adding fuel to the fire. It will amplify this message, and bring a sense of legitimacy to it. Further, the media reporting on an issue will cause other media outlets to report on the same issue so as to provide their viewers with a similar picture. Thus, once CNBC reported on the issue and it crossed into NBC, then it quickly spread to the remainder of the media outlets.
4) Strategy: As Gamestop kept going up, more traders wrote of “sticking it to the man” and “taking down the hedge funds.” Many showed off their “diamond hands” (meaning that they wouldn’t fold, like “paper hands”) and that they were joining the populist movement regardless of the cost but as more of a way to send a message. Everyone likes to root for the underdog and everyone likes to be a part of a movement. With the simplicity of no fee online trading, everyone could now take part for a few dollars at a time.
Lesson: Traders lose money and earn money due to emotion. While we like to think we are rational beings we truly are emotional. This why charities always appeal to saving one person in the village with your $1 a day as opposed to the reality and rational argument that your $1 buys the village a few gallons of fresh water. The David and Goliath, Main Street versus Wall Street, us versus them argument appealed to many which not only got them talking but got them buying which continued to cycle all over again.
The saga is not over, and we will keep an eye on what happens in the coming weeks as hedge funds and other short traders need to cover their positions. Will there be enough diamond hand holders to force the price up? Will the media continue to influence markets? No one knows, but if history has taught us anything, do not underestimate thousands of emotional individuals with a tiny bit to lose.