What Happened to WallStreetBets?
The rise and fall of the popular investment subreddit
Piecing Together the Past:
Whilst much has been written on the decline of the meme induced investment craze enabled by the subreddit WallStreetBets, most of the articles covering the events which lead up to the GameStop short squeeze and the eventual decline of frenzied retail trading have been written post the GameStop short squeeze, by authors who’ve attempted to pick up the pieces of the puzzle posthumously.
In this article, I want to go over the events that lead up to the GameStop short squeeze and the eventual decline of the subreddit from the perspective of someone who used to frequent the subreddit. I believe that reflecting on these events and their aftermath can provide an illustration of some core ideas in behavioral finance and the occasional prevalence of emotion over rationality in financial markets, which I intend to further address in part 2 of this write-up.
The Lead Up:
In late 2020, financial markets had gone parabolic. After a huge drop due to the global economic shutdown induced by the coronavirus, the S&P500 rallied to new highs, Bitcoin and other crypto-currencies were being discussed at family dinner tables all around the world and companies rushed to go public in this favorable environment, often opting to go public via SPAC’s to make the process even quicker.
WallStreetBets, at the time a few hundred thousand strong, was right in amongst the center of this chaos. The subreddit was full of various individuals making investment posts ranging from DD (due diligence) on various companies, to meme’s about market news or influential figures in financial headlines.
At the time, WallStreetBets had begun to gain a degree of notoriety in traditional financial media, as the mainstream clamored for an explanation for the recent bout of insanity which seemed to have overtaken certain corners of the financial markets.
The subreddit was not only likely the cause of a significant portion of the bizarre phenomena in financial markets at the time, but itself embodied the craziness that had overtaken markets. It was commonplace to see people making posts about buying short dated options with significant portions of their life’s savings, hoping to make it rich, or to come across posts of individuals’ brokerage accounts showing losses in excess of 90% (and occasionally, massive gains too).
Despite the craziness prevalent in the subreddit, the community’s crass sense of humor, inside jokes and nonchalance towards using the stock market as a casino gamified investing and helped the subreddit grow. As the community grew, its members collectively had more and more funding and were increasingly able to move the market. The more they moved the market, the more attention they received, which again lead to more members joining the community, a positive feedback loop.
A Breaking Point:
This positive feedback loop clearly couldn’t go on forever. There would one day have to come a breaking point. This breaking point was in the form of GameStop. The initial due diligence post for GameStop was posted by Keith Gill, a CFA charterholder under the reddit account u/DeepFuckingValue. In it, he detailed a thesis which hinged on the new PlayStation and Xbox consoles, which were soon to be released reviving the company’s profitability, as well as the company being quite cheap based on common metrics such as its price to sales to sales ratio.
Gill’s post quickly gained prominence and lead to a slow but steady pile on of investors in the subreddit.
Many stocks popular on WallStreetBets seemed to follow a pattern which looked something like this:
Initial investment posts are made.
Depending on how compelling the investment pitch is, other investors in the community pile on, driving the price up.
Once a stock’s price starts showing crazy gains, even more investors pile on out of “FOMO” (fear of missing out).
Eventually, there comes a point when those who got in early start harvesting gains, despite this, there still seem to be ample buyers providing exit liquidity and many convinced that essentially any price is worth paying, as often the companies which were popular on the subreddit were those which could be construed as being “The next big thing”, like EV, spaceflight or biotech companies.
The price peaks and the excitement begins to die down, eventually individuals lose interest and move on to the next exciting new thing, causing the price to start a gradual decline after the initial swift decline post peaking. Conversation about the stock recedes into niche areas of the subreddit, or into smaller subreddits, where mostly those who bought in near the top claim that they’re long term investors and that the company has such incredible growth prospects that in a few years the stocks’ price will be so high that what they paid won’t have mattered.
This pattern is evident just by looking at charts of the stock prices of various companies heavily mentioned on WallStreetBets during that time period. Below is a price chart for Quantumscape, an EV battery company popular on WallStreetBets at the time. It’s price went from around $15 per share to over $120 per share in a matter of weeks post it gaining popularity on the subreddit.
GameStop too probably would’ve followed this pattern, if it weren’t for one thing: The company had a whopping 140% short interest.
The Fallout:
The now historic GameStop short squeeze was the peak of the subreddits’ notoriety, as well as the beginning of it’s decline. The short squeeze story went mainstream, being reported worldwide, not just in financial media, but in widespread generalist media too. As more and more outlets picked up the story, more people rushed in to take part in the squeeze, often buying shares in GameStop near the peak of the squeeze.
Posts began to surface on WallStreetBets thanking the community for helping to solve financial hardships. One poster, for example, expressed gratitude, stating that he’d recently heard about the short squeeze on the news and decided to buy some shares. The shares quickly doubled in price and he was able to sell them to pay for a treatment his dog needed.
Posts like the one above went viral on reddit and attracted even more members to the subreddit. About 8 million new members joined in the weeks and months following the short squeeze. At the time when the squeeze began, there were only 2 million members in the subreddit.
This mass influx of new users lead to a change in the culture of the subreddit almost overnight. Prior to the short squeeze, WallStreetBets was completely amoral. Posters rarely cared about the ethics of a situation and instead focused on the subreddits core purpose: Finding the riskiest investments possible in an attempt to make it big.
However during the squeeze, the influx of new users lead to a number of posts talking about the squeeze as some kind of “movement” to get back at the financial sector for the harm done during the 2008 financial crisis (Something which is widely misreported as a primary motivation for the squeeze to this day).
Many of the new joiners also found the often vulgar language used on WallStreetBets unpalatable, opting to use less offensive terms. Overtime, this eroded many of the inside jokes and references which gave the community its’ unique identity. This, combined with the fact that what was now the majority of the community had no interest in finance up until hearing about the short squeeze, ultimately destroyed the subreddit.
Today WallStreetBets has over 14 million members. Despite this, one would be forgiven for thinking that the subreddit had ceased to exist entirely. In late 2020, members of the subreddit were wreaking havoc in financial markets, causing violent price swings and making headlines in financial publications weekly with less than 2 million members. Today, the idea of an online community of retail investors being able to move the market at all seems foreign.
Ultimately, it seems a small, but highly engaged community of 2 million was able to have a far larger impact than a loosely engaged community numbering 14 million.
The Cult of GameStop:
During the short squeeze, conspiratorial posts started circulating promoting false information claiming that the number of shares shorted was actually much higher than even the 140% reported and that hedge funds short GameStop had doubled down instead of closing out their positions, whilst conspiring to hide this fact. (Claims which were later refuted when the SEC published their report examining the situation).
Weirdly, these conspiracy theories lead to a situation in which a portion of the subreddit formed what can only be described as a cult. Over time, the beliefs of the cult grew more and more fantastical, with members even going so far as to (and I’m not kidding here) directly register their shares en masse, or in some cases even request physical delivery of their stock certificates to ensure that their shares were not being leant out to short sellers.
The cult subscribes to the belief that the true short interest in GameStop is many times the entire number of shares outstanding, and then conclude that if they all simply buy shares and never sell, eventually the short sellers will cover and the price of a GameStop share will reach hundreds of millions to Billions of dollars in a cataclysmic event called the MOASS (Mother of All Short Squeezes), which breaks the global financial system and triggers a worldwide collapse. Very Reasonable.
Given the extremity of these beliefs, you’d think that they’d only manage to gain a very niche following. In reality however, there are dozens of Subreddits devoted to this offshoot of WallStreetBets, the largest of which has nearly a million members. This community will feature prominently in part 2 of this write up when I discuss ideas in behavioral finance and how they are evidenced in various stages of the WallStreetBets story.
Conclusion:
WallStreetBets was an interesting and unique occurrence. The subreddit massively popularized retail trading during the pandemic and the eventual GameStop short squeeze was one of the most iconic moments in the history of finance. Ultimately, the subreddit suffered from it’s own popularity post the squeeze, attracting a massive base of outside individuals with little longstanding interest in finance.
Stay tuned for part 2 where I discuss behavioral finance in the context of the WallStreetBets story.