January: Robinhood Announces Zero Fee Cryptocurrency Tracking & Trading

Jason Yanowitz | December 26, 2018

The Story

On January 25th, no commission stock trading app Robinhood announced their plans to enter the crypto ecosystem. Under a separate entity dubbed Robinhood Crypto, the fintech unicorn planned to undercut existing competitors Coinbase and Binance by offering their 3 million users (currently 5 million) the ability to purchase and trade their favorite digital coins free of charge.

Said co-founder Vled Tenev, “We’re planning to operate this business on a break-even basis and we don’t plan to profit from it for the foreseeable future. The value of Robinhood Crypto is growing our customer base and better serving our existing customers.”

By using crypto as a loss leader outside of its primary business, the popular stock trading app could grow its user base and add a useful feature for its primary customer segment: millennials. Four days after the announcement, over 1 million customers had signed up for early access to the brokerage app’s crypto platform. All in all, Robinhood’s status in the crypto ecosystem seemed very rosy indeed.

11 Months Later…

Robinhood’s status in the crypto ecosystem is unclear. While the initial fanfare for their platform was considerable (their “Don’t Sleep” campaign received over 2.9 million views on YouTube within the first week) we haven’t heard, well, anything really since the initial announcement. What once seemed like a big move from a red-hot new entrant has fizzled into obscurity.

 The significance extends beyond just the promise of zero fee trading and a swath of new users. As a $5.4 billion dollar player making waves in the traditional financial sector, Robinhood was set up to add some much needed credibility to crypto. Simplified trading, an improved user interface, and the ability to integrate crypto and equities in a combined portfolio all under the Robinhood name seemed breathtakingly exciting 11 months ago.

So, what happened? It’s difficult to know for sure, but we can take some educated guesses.

  1. Crypto Winter: It’s been a tough year for crypto. 2018 has seen the total market cap for digital assets fall from a zenith of over $800 billion to under $100 billion, signifying a fall of 80–90% for most assets. Although Robinhood launched their trading platform when bitcoin was already down 50% in February, most “hodlers” had no idea of the continued price declines to come. Even Coinbase, the darling of the crypto industry, has seen an 80% drop in active users. Timing is everything, as they say, and it might be that Robinhood got unlucky this time.
  2. Data Concerns: Robinhood has faced backlash in recent months after a Wall Street journal article shed light on the app’s dubious monetization strategy. As opposed to existing online brokerages like E*Trade and Charles Schwabb, Robinhood relies on rebates from trading venues instead of transaction fees, meaning pricing optimization isn’t always passed onto users. Translation: when you buy or sell shares on Robinhood, the app is likely executing your trade at a slightly worse price than you’d find on other trading venues. Additionally, the app engages in the technically legal but ethically gray practice of order flow selling. This means that they track retail trade information, package it up, and sell it to sophisticated, high frequency traders who profit from your trade data. As the old saying goes, “If you’re not paying for the product, you are the product.”
  3. It’s Not Actually Free: If you’re like me, you rarely (never) read the fine print in user agreements. Luckily, the folks at The Block do. Here’s what they found.

Rebates and Pass-On of Fees. I understand that RHC reserves the right to pass on any fees charged by any Cryptocurrency exchanges, brokers, market-makers, liquidity providers, or other types of Cryptocurrency counterparties, trading venues, or intermediaries (each, a “Market Actor”), including in connection with the withdrawal of Cryptocurrencies to an external wallet or any fees related to any enhanced due diligence related to my RHC Account. I further understand that RHC may receive activity-based rebates from Market Actors in relation to Cryptocurrency transactions.”

Well then, it looks as if this “free” trading could get quite expensive for Robinhood Crypto users, although they’ll never know the true cost of their buy and sell trades, as the associated fees will be blended into the purchase or sale prices.” There’s no such thing as a free lunch, even in crypto.

4. It’s Not Ownership: Part of crypto’s fundamental innovation is the ability to own your own assets. When you deposit money with a fund, a brokerage, or even a bank, you no longer own that asset. You own an IOU. The innovation of private / public key cryptography changed all of that. As long as you alone preside over your private key, you maintain direct control over the assets associated with it. On Robhinhood’s platform, it is unclear who owns the private keys, and therefore unclear who truly owns the assets. (Spoiler alert — it isn’t you). For now, private key ownership is an important ethos of the blockchain movement and may deter true believers from using the platform.

Moving Forward

For those interested in following the crypto space, Robinhood is a company to watch going into 2019. The primary obstacle Robinhood will have to overcome is the same one all industry participants face — rapidly declining crypto prices. Luckily for them, crypto is not their core business, meaning they can invest and build while competitors Coinbase and Binance have more limited options. If they can buck the current trend on Wall Street and stick it out, the future for Robinhood (and by extension the crypto community) is very bright.

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Jason Yanowitz

Co-Founder of BWG