February 9, 2021
WRITTEN BY:
Melinda Head

Democratizing the Financial System

A convergence of events and storylines came together to create this financial David vs. Goliath story. Let's take a look at how it unfolded.

So what’s all this talk about Robinhood and Reddit?

At the best of times, understanding the complexities of investing is not easy. Most of us choose to bury our heads in the sand instead. That’s entirely understandable. A few of us dabble in the market for bragging rights, but most put savings in the hands of others, hoping for the best.

Let me try to explain the current events.

Stock Ticker Going Up

Robinhood

Robinhood is a privately held company that was founded by 2 millennials, Vladimir Tenev and Baiju Bhatt in 2013. Its main claim to fame is that it charges no fees to trade stocks and other financial products. Its trades are carried out by a third party, which pays Robinhood.

So now you know what Robinhood does. Who are its founders?

Vlad moved to the U.S. from Bulgaria when he was 5 years old. He is a math grad from Stanford University, where he met Baiju, a physics and math buff. In a nutshell, these men are 2 smart cookies, very smart. Vlad was included in Forbes’ 30 under 30 list.

After starting 2 other companies and witnessing the Occupy Wall Street protests, they decided to democratize financial services and founded Robinhood in 2013. Five years later the Company had a valuation of $6 billion. Early investors such as Nas, Snoop Dogg and Jared Leto were handsomely rewarded as well.

By Mike Fleshman - Occupy Wall Street March 16, 2012

“We stand with the people who are making their voices heard through the markets, and showing the world that investing is for everyone, not just for the wealthy and not just the institutions.” (Vlad Tenev, Co-founder & Co-CEO, Robinhood)

Reddit

Reddit is a privately held social news aggregation, web content rating and discussion website that was founded in 2005 by University of Virginia roommates Steve Huffman and Alexis Ohanian, and Aaron Swartz. Its majority shareholder is Advance Publications, a subsidiary of Conde Nast Publications. Like Robinhood, the Company’s valuation reached $3 billion in February 2019 and celebs Snoop Dogg and Jared Leto were on board, in addition to men with very deep pockets and highly successful track records:  Peter Thiel (co-founder of PayPal), Marc Andreessen (co-founder of Netscape), Sam Altman (OpenAI, Y Combinator that was behind Airbnb, Dropbox and Stripe, among others).

Short-Selling, Robinhood and Reddit

A member of the WallStreetBets community on Reddit, a forum that discusses controversial trading ideas and strategies, published a post that provided a strong bullish (positive) case for investing in Game Stop, which was being heavily sold short in an attempt to out-muscle amateur stock traders, induce panic selling and put a wack of money in their evil pockets. The Reddit community sprang into action, determined to thwart this money monster-made tsunami.

NYSE
NYSE

Let me briefly explain short-selling. This may require a few seconds of concentration. I will make it as simple as possible. You all saw it in the infamous movie, The Big Short, starring Christian Bale, Steve Carell and Ryan Gosling, as well as Brad Pitt. What a great movie!

This is what commission-free Robinhood investors, members of the Reddit community, attempted to do. It’s actually very simple: Because Game Stop shares were “borrowed”, they had to be returned or paid back, and quickly. But the whole institutional investors’ short-selling game hinged on the initial share price of Game Stop diminishing. Robinhood investors drove the stock price up, to around $350 from below $20, by investing a lot of money in Game Stop in a short time, which created huge losses for the greedy institutional investors who had counted on losses to fulfill their short-selling strategy.  

“They’re just having fun and they want to kind of stick it to the man more than anything.” (Jordan Belfort, author of The Wolf of Wall Street)

Money.com Article - How to Make Money With Robinhood App
Money.com Article - How to Make Money With Robinhood App

The Investor Experience

I talked to a 28 year old software designer who recently turned a $16,000 Game Stop investment into $100,000. He took his advice from DeepFuckingValue who, according to this investor, is a very nice guy with his own Youtube channel, Roaring Kitty.

When Game Stop was trading at $36 a share, his Discord chat group said: “That was the squeeze, it won’t go higher”, yet this Gen Y investor chose to stay put because he believes that “You can’t make a lot of money if you avoid risk”. Describing this tumultuous period, he said, “I wasn’t even sleeping during Game Stop.  When Robinhood shut down, that made my heart sink. I sold out of Game Stop then because I couldn’t handle it. It was too stressful. I took 3 days off work. I needed to refocus. I had already made $100,000”. And he added, “Now I have money to invest more safely. I see a lot of opportunity in electric car technology”.

“It was just about squeezing. This is a hedge fund that will be in real fucking trouble if we all get in on this … a 140% short interest is incredible. The plan was to hold the Game Stop shares as ransom and set the sell price for the exit of the stock. At first it was about just making money, then it kind of took a different tone. It turned more into: “These are the type of people who did the 2008 housing crisis … payback time.”

Teen Day Trader
Teen Day Trader - image from TheVerge.com article

The Aftermath

It comes as no surprise that traditional financial institutions and regulators did not take kindly to this series of events initiated by common people. They reacted swiftly and boldly.

Robinhood was required to fork over a $3.2bn security deposit to keep trading, resulting in the Company having to curb the buying/selling of shares temporarily.

Ribbit Capital, ICONIQ  Capital, Andreesen Horowitz, Sequoia Capital, Index Ventures and New Enterprise Associates stepped in to meet deposit requirements, saving the day.  

Conspiracy theories have abounded, including remarks that Robinhood’s largest client deliberately exacerbated the situation so that trading would be restricted. And others are breeding fear that Robinhood will crash and burn with the fall out from lawsuits.

Only time will tell. These are, indeed, very interesting times. A movie will be made about all of this, for sure. And one 28 year old investor has had the ride of a lifetime – he doesn’t need any more bragging rights.

“The mission of Robinhood is to democratize America’s financial system … Disrupting the status quo is pretty central to what we do.” (Baiju Bhatt, Co-founder & Co-CEO, Robinhood)

Baiju Bhatt - Robinhood Co-CEO
Baiju Bhatt - By TechCrunch

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About the Author

Melinda, a serial entrepreneur, is a sociologist and statistician. She believes there is no currency with greater value than knowledge.

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