Robinhoods New Crypto Wallet Lets Customers Get Lost in Crypto Industry

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The Robinhood (HOOD) investment app announced on Wednesday that it will provide a crypto wallet to clients, allowing them to send and receive crypto assets on its platform. Officially live in early 2022, the service is giving a whole new set of keys to retail investors for the crypto industry. This additional access comes with risks for customers and the potential for the company to change the way users interact with its platform.

The announcement comes after reports that Robinhood is publicly testing a beta wallet service, which customers have requested over the past year.

Robinhood Markets. (Photo illustration by Rafael Henrique / SOPA Images / LightRocket via Getty Images)

Almost all cryptocurrency exchanges allow customers to transact on and off their platform. Robinhood still has not given this functionality to customers. Unlike ACH bank transfers for fiat currencies, crypto transactions impose greater responsibility on users because blockchain-based transactions are permanent. Most exchange-based wallet services offer a copy / paste feature that reduces errors when sending on-chain transactions. However, misplacing a single digit in a wallet address during a crypto transaction sends a user money permanently to the wrong address.

Many of our crypto clients are new to crypto and haven’t actually done an on-chain transaction, said Christine Brown, Robinhood Cryptos COO at Yahoo Finance. We spent a lot of time working on our security features and wanted to make sure our experience was what our customers would expect.

Baiju Bhatt and Vlad Tenev celebrate after ringing the bell on Robinhood Markets IPO Day on July 29, 2021 in New York City. (Photo by Cindy Ord / Getty Images for Robinhood)

A crypto wallet allows users to send and receive cryptocurrencies to and from other wallet addresses. Previously, Robinhood held cryptocurrency for all of its customers and users could not withdraw their holdings from the platform.

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The wallet service comes as Robinhood rolls out more crypto trading features, such as the ability to place recurring buy orders at the average dollar cost in a coin, a strategy that helps investors reduce volatility. Brown said Robinhood is looking to add more crypto assets later this year and into 2022.

Robinhood shares have declined steadily since the peak in early August. The stock is now at $ 42, about 21% higher than its IPO close in July.

A crypto wallet using 0% transaction fees

Similar to the way it processes stock transactions on its platform, Robinhood does not charge fees for buying and selling crypto. Paired with a digital wallet, the company is looking to use a 0% transaction fee as a competitive advantage in the crypto space.

If I’m looking to buy an NFT, Robinhood might be the most competitive place to get a price on Ethereum (ETH) and then send it off the platform, Brown said. “We have a healthy ambition to bring many crypto benefits to our users. This is just the start.”

Over the past year, hiring on the company’s crypto side has quadrupled to around 80 employees. One of the reasons is that crypto is becoming a major source of revenue for the business. Details from Robinhoods’ latest results release showed that 60% of customers bought or sold crypto in the previous quarter and for the first time ever, more new customers placed their first transaction in crypto rather than in actions. The report also showed that Robinhood’s revenue from cryptocurrencies reached $ 233 million in the second quarter, up from $ 5 million in the second quarter of 2020. Robinhood said that 21.3 million people were actively using the platform. form for trading.

Getting more involved in the crypto industry allows Robinhood to potentially access billions of dollars flowing through the over $ 2,000 billion asset class, but it also exposes the company and its customer base to harm. greater risks, said Collin Plume, CEO and founder of crypto. IRA investment platform, MyDigitalMoney.

If the tax reporting of crypto entries and exits is not followed appropriately, this exposes them to potential liability. It also exposes them to potential ransomware attacks for customers and themselves, Plume said. “Overall, the risk is well worth it for this business and they have always been willing to take risks to grow.”

Plume also claimed that to say that Robinhood does not receive any commission on its transactions is misleading because “there is no way for a business to operate without profit”.

The question of Robinhood’s income

How Robinhood can make a profit without earning a commission is a hotly debated topic. Ultimately, a large chunk of his income comes from the stock brokerage model that Robinhood used to start 0% commission trading. Most competitors have since adopted this model called Payment for Order Flow (PFOF). In the PFOF model, Robinhood routes orders to various market makers like Citadel Securities or Virtu Financial whenever clients buy and sell a stock and are paid by these market makers based on order volume.

While the model is now the industry standard for competitive trading platforms, investors and U.S. officials have criticized payment for order flow, suggesting it is a major ingredient in a trading experience that primarily encourages the quantity of client transactions.

Vladimir Tenev, CEO and co-founder of Robinhood, is shown on an electronic screen at the Nasdaq in Times Square in New York City following his company’s IPO on Thursday, July 29, 2021 (AP Photo / Mark Lennihan)

In its July IPO filing, Robinhood discussed how important the brokerage model is to his business, saying its revenue has tripled to $ 959 million from 2019 to 2020, three quarters of that money. from the discounts he got by sending orders to market makers by payment. of the order flow.

David Keller, chief strategist at financial charting firm, StockCharts, has suggested a simpler reason why crypto is so attractive to the platform’s business as well.

Market corrections tend to be a tailwind for brokers, as clients are motivated to trade as volatility increases, Keller said.

Robinhood maintains that the PFOF model offers clients the best execution of orders at market price, saving them commission fees. Since the stock market meme frenzy sparked by Reddit earlier this year, when Robinhood was forced to stop trading due to the increased liquidity needs of stocks like GameStop and AMC, details of the business model have been revealed. , which prompted some customers to leave the platform. Robinhood now reveals how he makes money on his website.

Customers are their real product because of payment for order flow, said Maverick Lewis, 20. A student who previously used Robinhood to trade cryptocurrencies and stocks, Lewis cashed in all of his crypto holdings on Robinhood several months ago to open an account with Coinbase and redeem everything.

A crypto wallet feature on Robinhood would have saved Lewis fees, time and a potential tax headache, but Lewis said he would not return to the platform because the business model does not value them. clients.

While the market structure between stocks and crypto is not the same, some crypto exchanges also use PFOF in combination with charging commission fees.

David Hollerith is a senior journalist covering cryptocurrency and the stock markets.

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