In Focus: Robinhood Attacks
Last week Robinhood ($HOOD) announced it would offer a crypto wallet feature to its customers. While the stock did have a one day pop after the announcement, investors didn't seem motivated to accumulate Robinhood shares, the stock closed up only 6% from the prior week's close.
Investors may be missing how big this news is for Robinhood. With a crypto wallet Robinhood will help its customers move funds to and from the platform, which I view as a great customer service for its users. In addition, the move goes right at exchanges like Coinbase ($COIN) that charge commissions to buy, sell, and transfer cryptocurrencies.
While Robinhood's crypto offering has been limited to date, it has been extremely successful for the company. The company reported in Q2 2021 that 22.5% of its assets under custody are cryptocurrencies, with 60% of funded accounts participating in crypto trading during the same quarter.
One of the companies under attack by Robinhood's recent news is Coinbase. Coinbase has been getting hit from all sides it seems. Recently China put the kibosh on all things cryptocurrency related. The CCP has implemented a blanket ban on cryptocurrency transactions and mining. The news sent a wave of fear through the markets that caused a hard sell off of Coinbase last Thursday. Bitcoin ($BTC-USD) also experienced a heavy sell off, dropping more than $2,000 on the day.
With an abundance of cheap energy and cheap labor with critical tech knowledge, China became the home to some of the world's largest Bitcoin mining pools. Which is why last week's news had such a strong impact on all things crypto, like Coinbase.
Also, earlier in the month the SEC threatened to sue Coinbase over a crypto lending instrument that the company had plans to roll out. First the SEC, then China, and now Robinhood. It's been a tough September for Coinbase and Coinbase investors.
As of this writing Coinbase is trading at $231.82, down 29% since becoming a public company. Robinhood, has feared a little better as a public company, its stock price is up 18% since going public. Even though the stock is up since becoming a public company, most investors view the Robinhood IPO as a dud.
Robinhood's own indirect battle with the SEC has been a major issue that has scared investors away from Robinhood's stock. The SEC has recently stated that banning payment for order flow is on the table. Payment for order flow is how Robinhood is able to offer commission free trading.
Robinhood and other firms offer their customer's trades to a market maker for execution, allowing the market maker to collect a spread and reward Robinhood with a rebate. While Robinhood didn't invent the practice, they seem to be the firm coming under the most scrutiny for it. To say a ban on payment for order flow would hurt Robinhood would be a big understatement. Robinhood collects about 80% of its revenue from payment for order flow.
A possible ban on payments for order flow is a reasonable reason to avoid investing in Robinhood. However, I have doubts that anything will change, because as I stated earlier, Robinhood isn't the only firm selling order flow.
Disruption, Disruption, Disruption
Robinhood's commission free trading platform disrupted a part of Wall Street and forced the big discount firms to adopt a commission free lifestyle. Can Robinhood do it again with its crypto wallet?
The company's recent announcement didn't catch me by surprise, but it wasn't the news I was hoping for. My Robinhood investment is based on one thing and one thing only, DISRUPTION. So the company's recent plans, while they aren't the plans I had hoped for, they still managed to disrupt, even more surprisingly, the news disrupted an industry of disruptors.
As someone who likes market chaos, I'm waiting for the day when Robinhood starts offering pink-sheet stocks and foreign exchange and futures trading. Robinhood plus wallstreetbets plus access to futures trading seems like a winning combination of chaos that I think will increase Robinhood's social value, followed by its financial value.
For Robinhood to be the company I think it can be, it has to continue to grow, become all things financial, and provide few reasons for its users to leave the platform. Crypto wallets are a great step in that direction. I'm still bullish on Robinhood.