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Robinhood loses out as crypto trading slows

https://todayuknews.com/finance/robinhood-loses-out-as-crypto-trading-slows/

This was supposed to be Robinhood’s big year.

The trading platform started 2021 with the kind of following some companies can only dream about. It had amassed more than 12 million customers with funded accounts since launching in 2015 and was reaping the benefits of a retail-trading boom. A highly anticipated public-trading debut was in the offing.

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But the company said this week that third-quarter revenue fell 35% quarter over quarter, weighed down by a 78% drop in revenue tied to customers’ cryptocurrency trading. New funded accounts fell to 660,000 from 5.1 million the quarter before. Robinhood expects revenue to decline again quarter over quarter in the final three months of the year and projects that new funded accounts will roughly match July through September.

While the company doesn’t expect to sustain the growth it had seen earlier this year, the results highlight a question that has swirled around Robinhood: If financial markets don’t continue on the ebullient path they have charted for much of the past 18 months, will the company be able to keep up?

“If you’re constantly tracking fads, it’s a tough business model,” said Larry Tabb, head of market-structure research at Bloomberg Intelligence.

READ What you need to know about payment for order flow, and why Robinhood cares so much about it

Investors on Wednesday punished Robinhood after the results. Shares tumbled as much as 13% before finishing the day down 10% at $35.44, below the company’s initial public offering price of $38 for the first time since early August. On Thursday, Robinhood shares were up 0.1% to $35.47.

Part of the stock performance might have been affected by an additional 62 million shares that became tradable Wednesday, analysts said. Those shares are owned by some employees as well as by some of the companies that provided Robinhood emergency funding during the GameStop frenzy earlier this year.

The company declined to comment. On its earnings call Tuesday, Robinhood’s chief financial officer, Jason Warnick, said the company doesn’t expect its growth to be linear.

Year over year, the company said, growth in metrics ranging from revenue to active users was strong.

Financial markets, however, are different from a year ago, with 2021 bringing the arrival of meme stocks, large inflows into speculative cryptocurrencies and a US stock market that seemed only to go up.

In the second quarter, for example, Robinhood said it brought in $144m in revenue alone from customers trading in dogecoin, a cryptocurrency that started as a joke, surged this spring and then fizzled out.

Though Robinhood hasn’t disclosed specific dogecoin figures for the third quarter, the company said Tuesday it brought in $51m in revenue during the period from customer trading of all seven of the cryptocurrencies available on its platform.

The company hasn’t added shiba inu, the latest meme cryptocurrency, to its platform, missing out on demand for the digital asset from individual traders.

READHere’s how shiba inu became the world’s 12th largest crypto

Robinhood is in no way the only company to see growth align with the retail-trading mania that has gripped markets since the start of the Covid-19 pandemic.

Its larger rival, Charles Schwab, also saw new brokerage accounts rise sharply earlier this year and then grow at a slower pace in the third quarter.

Unlike Schwab and other big brokerages, Robinhood receives the bulk of its revenue from payment for order flow, a widespread practice in which online brokerages send customers’ orders to high-speed trading firms.

The practice has faced increased scrutiny this year, including from Securities and Exchange Commission chairman Gary Gensler.

In the third quarter, this transaction-based revenue accounted for 73% of Robinhood’s total revenue.

Of that, Robinhood earned the most from options transactions, followed by crypto and then stocks.

Robinhood also makes money from other sources, including lending out customer securities and from its Robinhood Gold program, for which customers can pay for advanced trading tools.

Executives at Robinhood emphasized that the company is working to diversify product selection and focus on safety.

Asked on a call with reporters Tuesday if the company would add more cryptocurrencies, such as shiba inu, to the platform, Warnick said the company was “being cautious about adding new coins.”

More than one million customers are on its wait list for cryptocurrency wallets, which will allow users to move digital asset holdings in and out of the app, Robinhood said Tuesday.

The company also continues to expand its program that allows users access to initial public offerings before a company’s shares start publicly trading.

READRobinhood shares fall on SEC’s warning of possible restrictions on payment for order flow

Robinhood also highlighted that it is looking to roll out retirement accounts that have tax advantages.

Meanwhile, about a quarter of the company’s funded accounts use its cash-management feature that allows customers to earn interest on their uninvested cash.

Many analysts and market observers believe that, to compete with entrenched brokerages in the industry, it will be crucial for Robinhood to expand financial services and offerings.

“Robinhood has proven the naysayers wrong numerous times,” said Devin Ryan, director of financial technology research at JMP Securities.

Write to Caitlin McCabe at [e-mail]

This article was published by Dow Jones Newswires