Robinhood's One Step Closer to Launching Wallet Feature

The popular online broker is testing new crypto deposit and withdrawal functionality.

Robinhood customers may soon be able to deposit and withdraw cryptocurrencies. A report from Bloomberg suggests the popular stockbroker is testing a new wallet function. The financial news site glimpsed the new capabilities in the beta version of Robinhood's app. It looks like users will initially have to sign up to a waiting list.

Robinhood crypto clients have been asking for a non-custodial option -- a wallet they control -- for some time. Currently, clients can only keep their crypto assets in a custodial wallet that lives on Robinhood's servers.

The long-awaited wallet functionality would bring Robinhood's crypto offering more in line with top cryptocurrency exchanges like Gemini and Coinbase, which already have flexible wallet options.

Robinhood's crypto offering

Robinhood pioneered zero-commission stock investing and was one of the first online brokers to open the door to cryptocurrencies. Its recent second-quarter results showed that crypto trading now represents a significant part of the company's revenues.

Customers can buy seven cryptocurrencies, including Bitcoin (BTC), Ethereum (ETH), and Dogecoin (DOGE). Interestingly, Dogecoin accounted for 34% of crypto trading revenue in the first quarter of this year, and a whopping 62% in the second quarter.

However, the company is also discovering that cryptocurrency users want different functionality from stock traders. That's why the company's CEO and co-founder Vlad Tenev spoke in March about plans to launch a crypto wallet "as fast as possible." There have been more promises since then, but this is the first concrete sign we've seen that the wallet may indeed appear.

Why crypto wallets matter

Put simply, non-custodial cryptocurrency wallets give users control over their assets. They come in several different forms, and crypto investors often own more than one wallet.

• Hot wallets are connected to the internet and are often used for smaller amounts of money that people want to access easily. Some are purely web-based, while others work through mobile apps or need to be installed on your desktop.
• Cold wallets, or hardware wallets, are kept offline and are probably the most secure way to store large amounts of cryptocurrency.

Each crypto you own has a public and a private key. This is a bit like an email address and a password -- you can share your email address or public key with other people, but only you should know your private key or password. Crypto wallets store the keys to your crypto.

It's worth bearing in mind that there's no helpful "forgot password" function in crypto. If you lose your private key, you won't be able to get your crypto back, which is one reason some investors prefer to leave their assets in a custodial wallet like Robinhood's.

Do I need a wallet?

There are several reasons crypto enthusiasts prefer to store funds in an external wallet -- indeed, some argue it's essential. The rallying cry of, "Not your keys, not your crypto," is rooted in the idea that if you don't control your crypto keys, you don't truly own your crypto assets.

Here are a few of the pro-wallet arguments:

• Crypto exchanges are often targeted by hackers. The first major cryptocurrency exchange hack was Mt. Gox in 2014 when around $450 million worth of crypto was stolen. Cryptocurrency exchanges have upped their security since then, and several have third-party crime insurance. Nonetheless, hacks do happen.
• Wallets can make it easier to spend and trade crypto. If your crypto is in a hot wallet like MetaMask, you can connect it and pay for decentralized finance (DeFi) services or trade on a decentralized exchange.
• Crypto exchanges can experience outages or even be closed down by local authorities. This year, popular crypto exchange Binance has been banned in several countries, and in some cases, investors were temporarily unable to withdraw their assets.

As your crypto portfolio grows and you get more confident with everything crypto-related, a wallet will become increasingly important. But investors first need to be comfortable with the additional responsibility they're taking on.

Not only do you need to take steps to protect your password, but you'll also need to ensure you back up your wallet and potentially also beef up your anti-virus protection. There are other considerations too. For example, you'll need to make sure your beneficiaries know how to access your coins in the event of your death.

Almost 20% of Bitcoin in existence is lost or otherwise inaccessible. A big contributing factor? Lost keys and lost wallets. One man in the U.K. threw away a hard drive with 7,500 BTC (worth over $300 million). He's spent years fruitlessly lobbying local authorities for permission to excavate his local garbage site.

Bottom line

It's great that Robinhood may soon give customers the ability to deposit and withdraw their crypto assets from the platform. Cryptocurrencies aren't stocks, and it's important to recognize that crypto investors have different needs.

However, if you're only just dipping your toe in the water, don't feel like you have to dive all the way in with a wallet just yet.

RELATED: Check out The Ascent's guide to the best NFT wallets.