I'm pretty sure Squall is dead was created as a joke, not a real theory. Some people did start actually believing it though.
Oh the people who created it 100% believed it. The original Squall is Dead theory was that he died in the ending of Final Fantasy VIII and what we saw at the end was a ghost. The second version of the theory which is the most popular one now is that Squall died at the end of disc 1 and I remember the creation of it back on the old forum.
I just love how apparently everything in disc 1 was totally cool and normal but then DISC 2 AND ONWARD IS FUCKING CRAZYYYYYYYYYYYYYY even though you know...Disc 1 features:
- Fire Cavern where you fight a giant summon
- Dollet field exam
- Two Laguna flashbacks
- Dummy President turning into a giant organ monster
- Diablos and Brothers(also pointed out that you can do these later in the game which means Squall magically guesses these events accurately?)
- A sorceress abducting someone and murdering the president
- Sorceress using her magic to control and manipulate people and objects(the Iguions)
- Squall jumping from a tower and not breaking his legs and then ending with him being impaled by magic