Stock trading platform Robinhood Markets (HOOD -0.64%) was once the recipient of significant praise from the investment community for its success in attracting coveted younger users like Generation Z that other brokers never could.
In fact, up to half of Robinhood's customers are entering the financial markets for the very first time. But in an attempt to maintain these users, the company made significant changes to its product offering. While it's best known for stocks and options broking, Robinhood now has an enormous cryptocurrency broking segment.
The company has suffered intense regulatory scrutiny, and this shift into crypto might complicate things further. With Robinhood's stock down 78% from its high, the question is whether it should lean more into this new area, or pull back.
The crypto shift
In the third quarter of 2020, Robinhood customers' cryptocurrency trading activity made up just 2% of the company's total revenue. In the same quarter of 2021, that number rose to 19% -- but it was as high as 51% in the second quarter. Whether Robinhood intended for this to happen or not, there's no escaping its newfound reliance on this mostly speculative asset class.
And that's a big part of the problem -- most cryptocurrencies have no proven use-case. Even Bitcoin, which is the largest token by market value, is only accepted as payment by 7,668 merchants worldwide. This lack of adoption flies in the face of the argument that Bitcoin is a currency, and its seismic fluctuations in price also make it incredibly difficult to rely on as a store of value.
But Robinhood's customers have a tendency to take speculation to the furthest degree, as highlighted by 40% of the company's cryptocurrency revenue coming from Dogecoin alone. Dogecoin is a popular meme-token that its founder says was created as a joke.
To make matters worse, Robinhood might be adding Shiba Inu to its platform in the new year -- a token that's even more reliant on rampant speculation than Dogecoin. In fact, Robinhood users have established a petition on Change.org to have Shiba Inu included, and it has over 550,000 signatures right now.
It's becoming more complicated
Robinhood holds over $22 billion of its customers' cryptocurrency assets in its custody, but these are not protected by the same government regulations as traditional assets like stocks. In its filings to the Securities and Exchange Commission (SEC), Robinhood states that it's unable to hold adequate insurance to safeguard all of its customers' cryptocurrencies, and they could be vulnerable to losses in the event of a hack.
But the crypto industry as a whole is being reformed as we speak. Recently, the U.S. government announced that as of 2023, cryptocurrency brokers like Robinhood would need to record customers' crypto transactions and report them to the Internal Revenue Service (IRS) for tax purposes. This means that holders of cryptocurrencies could be liable for a tax bill every time they sell, exchange, or spend their tokens.
Further regulation is an inconvenience that could turn the average punter away from these assets. Ease of access is one thing that separates cryptocurrencies from other financial products like stocks or options, which are tightly regulated. But with that said, greater protections could be beneficial for investors who might not be fully aware of the risks they face.
Robinhood needs more than just crypto
Beyond the risks cryptocurrencies pose to Robinhood and its customers, the company is facing regulatory pressure for some of its other practices, too. In December 2020, it was fined $65 million by the SEC for misleading investors about the true costs of its commission-free payment for order flow (PFOF) revenue strategy. And the regulator has also taken issue with its "gamified" smartphone platform. which is said to encourage risky behavior among its young investor base.
In light of these issues, it seems Robinhood's best bet would be to clean up its backyard before leaning further into yet another heavily scrutinized area, like the expansion of its cryptocurrency business.
In fact, since the company's average revenue per user was $65 in the recent third quarter, a 52% decline from its first-quarter peak and the lowest level in 12 months, maybe cryptocurrencies aren't the place for Robinhood to build its long-term foundations after all.
With a stock price loss of 78% since hitting its all-time high in August, investors must be wondering how much is enough. It might be time for Robinhood to return to its roots as the most innovative stock and options broking platform, with a renewed focus and some adjustments, of course. Adding more cryptocurrency broking alone just isn't getting the job done.