The trading platform, Robinhood, is quickly gaining relevance in the crowded space of stock brokers by offering no-fee trading on equities, options, and cryptocurrencies.
Robinhood’s Cryptocurrency Model
Valued at an estimated $5.6 billion, Robinhood is the world’s second most valuable private trading company. It has over four million customer accounts, and in May 2018, the application launched cryptocurrency trading to great fervor.
While zero commission stock trading can be profitable, Robinhood’s cryptocurrency division operates on a zero-profit model. The concept may raise eyebrows, but it is similar to Square’s strategy of offering no-fee Bitcoin trading through its Cash app earlier this year. The move paid off well for Square, as it recorded profits of $223,000 selling Bitcoin in the first quarter of operation.
With the absence of market makers in the cryptocurrency industry, Robinhood and Square purchase Bitcoin from retail cryptocurrency exchanges, including Coinbase and Bitfinex. The companies then resell Bitcoin to investors at a profit from the “spread,” or difference between selling and buying prices. However, the business strategy has its challenges and can be prone to failure on days when the market is highly volatile.
Cryptocurrency Business a Gateway to Other Markets
Robinhood CEO Vlad Tenev remains confident in the strategy, as the cryptocurrency business functions for the company as a gateway to attract more retail investors to traditional markets where Robinhood’s profits are made. Tenev stated, “[t]he thinking behind what we’re doing is building an ecosystem. Right now the products are investing products, so crypto slots in nicely alongside the 10,000 plus other instruments that people can trade.”
The entrepreneur believes commission fees are a “relic of the past,” and only had a legitimate function until electronic trading was introduced to the market. Previously, trading was an expensive affair, with each trade costing an average of $10. Tenev points out that the typical brokerage’s main expenses were formerly operating and maintaining data centers, networks, and infrastructure, expenses which have now essentially “gone to zero.” Technology and automation have done away with much of the cost-intensive physical infrastructure, reducing the need for substantial commission fees.
Robinhood’s Future Plans
Tenev provided insight on Robinhood’s future plans in general and with cryptocurrency in particular. The business aims to expand their reach beyond being a trading intermediary to that of financial powerhouse, providing “everything Bank of America currently offers and more.”
According to Fortune, Robinhood currently tracks 16 cryptocurrencies in addition to Bitcoin, to assess whether they are viable future candidates for trading. Tenev mentioned that the company is analyzing the coins from multiple angles, factoring in the backgrounds of the teams behind the coins, susceptibility to hacking, and stability. The cryptocurrencies being tracked include Litecoin, Ripple, and Zcash.