How A Kid Turned $50,000 into $47M This Week
Get ready for the story that will set the tone for the rest of the decade.
If you're feeling it, play this song as you're reading the newsletter. It should give it the dramatic effect it deserves.
You all set? Then let's go.
In case you didn't hear, a bunch of 20-somethings on the Internet rallied together this week to take down a billion-dollar hedge fund.
Melvin Capital, a Wall Street hedge fund, placed a bet that would make them a lot of money if the stock of GameStop, a video game retailer, went DOWN. (I'll spare you the technical details, but will list some links below so you can learn how that works).
Unfortunately for them, a couple of smart guys on the internet found out what they were up to, and just to stick it to them, encouraged hundreds of thousands of mostly 20-year olds on the social news site Reddit to BUY the stock and make it go UP.
Their goal was simple - to force the hedge fund into bankruptcy. Millennials blame hedge funds like Melvin Capital for the financial crisis of 2008 and for manipulating markets behind closed doors to make billions off the backs of the little guy (which they do).
To everyone's surprise, they succeeded.
Melvin Capital and their colleagues collectively lost more than $5 billion as the stock went from $17 to $347.
In the process, one of the kids on the other side turned $50,000 into more than $47 million. You read that right. Talk about a real-life Robinhood story.
10 years after the Occupy Wall Street movement, the protesters have found out how to use money & the internet to their advantage. This is a win for the little guy and a turning point for the all-powerful suits of finance.
Yeah, Melvin Capital, the kids ain't alright.
(the story is still evolving. Game Stop crashed yesterday as brokerages banned the purchase of the stock, but it's up again over 100% in early pre-market trading. Grab your popcorn.)
Welcome to the decentralized future
I suspect 99% of people will underestimate what happened this week, but I encourage you not to.
Never before in history could millions of people come together and agree to invest in a single stock on a single day, with the sole purpose of bleeding the people in power. Yet it happened: on Wednesday, GameStop became the most traded stock on the planet, ahead even of Tesla.
2.7 million (the number of people in the Reddit thread) locked up, 20-somethings have turned into an army of daytraders who use the power of numbers and social media to bend traditional power-players to their will.
In a few hours, they transferred billions from hedge fund managers to everyone else.
Of course, hedge funds, the traditional media, and traditional brokerage firms are fighting back to preserve the status quo. Popular stock trading apps have banned trading in these stocks. CNBC demonizes the traders as irresponsible.
Anything to stop some kids from getting rich rather than the hedge funds.
But in the process, legacy institutions like Wall Street are digging their own grave. Anyone who wasn't convinced before, now KNOWS that the game is rigged against the little guy.
This comes just after Big Tech colluded to silence a sitting President of the United States and thousands of conservative voices by essentially banning them from the web altogether.
"If you can silence the King, you are the King."
People have no doubt anymore that centralized, legacy institutions don't have their best interests at heart. And individuals are leaving institutions en masse.
Bitcoin, social media, homeschooling, remote work, and the creator economy are all examples of the rapidly accelerating new paradigm: the move from centralization to decentralization.
This shift in power and wealth from institutions back to the individual is the biggest in more than 200 years.
It will usher in freedom, innovation, and abundance. And it's what makes me incredibly optimistic about the future.
Rapid-Fire Best Insights
Speaking of investing: I know many of you are trying to time your entry into Bitcoin/Ethereum. "Maybe when it pulls back, maybe next week, etc."
My advice is - don't. Establish your position if you want, and then use tapas (self-imposed voluntary restraint) to avoid sabotaging your own psychology by staring at the daily ups and downs of the market.
Elon Musk showed support for Bitcoin on Twitter this morning, and it soared 20% in minutes. Anything can happen. In 5 years, it won't matter if you bought at $30K, $40K, or $50K. So buy it, lock it and store it away.
Quote of the week: "GameStop is a reminder that investing is not the study of finance. It's the study of how people behave with money, and sometimes those behaviors are incredible." - Morgan Housel (who by the way, has a great book called The Psychology of Money)
Best article I read this week: GameStop mania reveals power shift on Wall Street - and the Pros are reeling
And for good measure, if you want to understand WHY 20-year olds are angry, and doing what they're doing, read this open letter to CNBC.
Best Tweet I came across: If you want to understand how a hedge fund can lose so much money when a stock goes up (because they "shorted" the stock), this is a super simple explanation.
Anything else I think you should know: last week, I told you that "in 2021, offense is the new defense."
Remember, there are 2.7 million people inside the Reddit thread where all this started. They want things to change, and technology has enabled them in unprecedented ways.
2021 promises to be wild.
Until next week,