Robinhood Markets Inc; Was crypto really its poison arrow?

Few were surprised at Robinhood’s dire earnings results this week, which disclosed substantial underlying losses, a steep decline in users and the announcement of a second major workforce restructuring this year alone.

With the NASDAQ-listed hybrid exchange having already shaved 50% from its share price on a year-to-date basis, analysts were roundly pessimistic in the lead up.

Many, including chief market analyst at CMC Markets UK Michael Hewson, pointed to Robinhood’s crypto double down as a major culprit for the company’s bad fortunes.

“The popping of the meme stock bubble along with sharp declines in Bitcoin has eviscerated Robinhood Markets’ business model, along with the share price,” said Hewson, whose forecasted losses of US$0.23 per share were still too optimistic.

Following the earnings outcome, Robinhood’s chief executive Vladimir Tenev echoed similar statements, but to what extent is the crypto winter to blame for Robinhood’s unenviable position?

Crypto and Robinhood: A quick recap

As a hybrid exchange, Robinhood deals in both the traditional markets and cryptocurrency, although it has not always been so bullish on the latter.

Robinhood first dipped its toes into crypto with Bitcoin and Ethereum listings in selected US states in early 2018.

For the following four years, Robinhood kept a tight leash on what crypto assets it allowed on the platform, limiting traders to only seven digital assets: Bitcoin and Ethereum of course, as well as Bitcoin Cash, Bitcoin SV, Ethereum Classic, Litecoin and Dogecoin.

Six of these seven digital assets share Bitcoin’s codebase, while Ethereum Classic shares — you guessed it — used Ethereum’s original codebase.

It was all going swimmingly for the platform’s carefully curated crypto offering: The customer base increased 458% in the first quarter of 2021 alone and Robinhood’s crypto team tripled in response.

Robinhood looked like it was shifting gears and going large on crypto, buoyed by extraordinary transaction-based revenue (TBR) growth of 1,145% come December 2021 off the back of an unprecedented crypto bull market.

The end-of-year earnings statement laid out a vision: “Robinhood has set aggressive goals to start opening its crypto platform up to customers internationally in 2022. The company believes in the immense potential of the crypto economy and sees a big opportunity in serving customers across the globe.”

But an unprecedented crypto bull run was followed by an unprecedented crypto winter, and Robinhood’s first-half results showed a 39% decrease in crypto TBR year on year.

It was a huge reversal from the enormous gains obtained in 2021 and perfectly underscored the intense volatility of the crypto markets.

After a disappointing quarter, Robinhood slashed its workforce by 9% while continuing with its crypto expansion, adding a number of new j#coins including, most notably, the Shiba Inu meme token. 

A crypto wallet option was also rolled out.

The expanded offering seemed to help a bit: Wednesday’s second-quarter results showed a 7% increase in crypto TBR.

But it was not enough to counter the company’s total net losses of US$295mln equating to -US$0.34 per diluted share for the quarter.

So, is it all crypto’s fault?

According to Chief executive Vladimir Tenev, equities and crypto are both to blame for Robinhood’s underwhelming position.

“We have seen the additional deterioration of the macro environment, with inflation at 40-year highs accompanied by a broad crypto market crash,” Tenev said in a blog post, adding: “This has further reduced customer trading activity and assets under custody.”

But Tenev also admitted that Robinhood severely misjudged its strategy.

“Last year, we staffed many of our operations functions under the assumption that the heightened retail engagement we had been seeing with the stock and crypto markets in the Covid era would persist into 2022.”

The latest earnings did show that crypto was the only segment to show an increase in TBR (7%) against -11% in the options segment and -19% in the equities segment.

But taking a longer-term view shows that crypto has without doubt shrunk the most drastically over the past 12 months, while equities and options, though also taking a hit, have been less extreme.

Crypto TBR began dropping midway through 2021– Source: investors.robinhood.com

The data shows that between the second and third quarters of 2021, crypto TBR fell by 78% from US$233mln to US$51mln.

The question is, why?

Enter the meme stocks

While it’s easy to point to the devastating crypto winter that has so far wiped US$2tn from the crypto markets in 2022, earnings show that Robinhood was suffering losses even when the markets were hitting all-time highs at the tail end of 2021.

The figures say it all: Underlying earnings (EBITDA) was US$90mln with a positive margin of 16% in the second quarter of 2021; the following quarter saw EBITDA losses of US$84mln with a negative 23% margin.

Things did not improve in the following months.

EBITDA began to nosedive midway through 2021 – Source: investors.robinhood.com

EBITDA began to nosedive midway through 2021 – Source: investors.robinhood.com

When meme stocks became the biggest story of the market in early 2021, Robinhood found itself front and centre of the action.

Thousands of retail investors took advantage of Robinhood’s zero-commission trades to load up on Gamestop and AMC shares in an effort to short squeeze institutional investors betting on the flagging chains to fail, spurred on by Reddit community r/WallStreetBets. 

“A new generation turned the act of investing into a mass movement that revealed the power of individual investors,” Robinhood said.

But Robinhood was unable to cope with the massive inflow of customers, forcing it to restrict trades on the securities.

Traders, meanwhile, started accusing Robinhood of market manipulation and steamrolling retail investors.

It was a massive blow to Robinhood’s reputation, attracting regulatory scrutiny into its business model, Congressional hearings and class-action lawsuits.

The Robinhood mobile app got review-bombed with thousands of one-star ratings and physical protests.

Customers started flocking from the platform.

Active users have dropped over 34% year on year – Source: investors.robinhood.com

Meanwhile, average revenues per user have declined from US$137 in the first quarter of 2021 to US$56 today, with an average user account size of US$4,000.

In comparison, TD Ameritrade (NASDAQ:AMTD)’s average account size is US$234,000 while Fidelity goes all the way up to US$279,000.

Robinhood’s account sizes are among the lowest of any investment platform – Source: brokeruser.com

Robinhood’s account sizes are among the lowest of any investment platform – Source: brokeruser.com

Such is the fickle nature of small-value retail users: If they feel double-crossed, they’ll jump ship just as quickly as jump aboard.

Although that still doesn’t answer why Robinhood’s crypto segment suffered the heaviest hit following the meme stock blowout.

As it turns out, another meme star, Dogecoin, accounted for 62% of all crypto revenues in the second quarter of 2021, potentially driven by Robinhood’s newly acquired client base of meme traders.

Perhaps, in the end, such a customer portfolio was simply unsustainable.

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