On January 25. stock trading app Robinhood surprised the cryptocurrency community by announcing that they were entering the cryptocurrency market. Since then, over a million people have signed up to trade on their soon-to-be-released exchange. How will Robinhood impact cryptocurrency markets?
Last April, Robinhood stated that they had over 2.5 million registered users and were gaining another 140,000 users each month. Assuming those numbers have held, they should now have over 3.5 million users (all located within the US). What’s the draw? Robinhood is using free cryptocurrency trading as a way to bring in new customers. Once they lure cryptocurrency traders, they intend to introduce them to traditional stock investing. Indeed, the latter is where they intend to make their profits – on margin trading, gold subscriptions and interest from brokerage accounts.
In comparison, privately-owned Coinbase is an international company that boasts 13+million users. Despite limited new coin offerings, they have secured more than a billion dollars in revenue this year. Should they be worried about Robinhood?
In The Short Term, Not At All.
Robinhood has said that it will initiate operations in 5 states: California, Missouri, Massachusetts, Montana, and New Hampshire. The map above shows the number of users that have registered as of June 2017. As you can see, Robinhood’s popularity rests within urban areas and the Northeast (particularly Massachusetts). Likewise, California is also set to become a major market for them as well. And yet, it’s unlikely that the millions who have joined their waiting list reside only in these 5 states. They’re simply where the early adopters are concentrated.
However, Robinhood has struggled to move beyond the US market. Despite a gaining access to the Chinese market, they pulled out after finding China’s regulatory requirements untenable. At present, they’re trying to enter the Australian market but have yet to initiate a product-release within the country. As such, they’re unlikely to seek out international customers anytime soon. One wonders just how many active users they will be able to secure from the United States market alone.
Moreover, the Robinhood app does not have the capacity to deposit coins from other exchanges or wallets. And only coins purchased through Robinhood can transfer to fiat. Although the company asserts that they’re working to accept coins from other locations (via an anti-laundering system), there is no ETA yet on when it will be implemented. At present, users can transfer/withdraw coins from the app once they go through a verification process. While this is not terribly complicated for new investors (or those simply interested in BTC and ETH), active investors may find this arrangement problematic. Altogether, these limitations may very well hinder future adoption.
Robinhood’s Marketing Ploy
Robinhood’s entrance into the crypto market suggests that fewer traditional investors are using their app. If so, their free trading offer might be an attempt to bring in those next-generation investors who remain wary of the stock market. They certainly have no desire to go “all-in” on crypto trading, having observed how problematic that has become for Coinbase. Instead, its much more likely they’re seeking to become a loss leader in the market. That is, they will lose money on crypto in order to attract future stock investors. The question then becomes, how much will they invest to create the optimal crypto trading experience as such?
That amount certainly remains open to conjecture in the long-term. Assuming that they are able to operate in all 50 states, the answer might be substantial. As cryptocurrency becomes mainstream, an abundance of traditional investors will seek out inexpensive ways to enter the market. To put it simply, new investors will have to decide between Robinhood or Coinbase as their trading app of choice.
For now, it appears that Robinhood will likely pillage at least some users from Coinbase. However, until Robinhood users can easily deposit coin and convert them into fiat, their price advantage appears limited. Worse yet, investors may simply purchase crypto from Robinhood and then transfer it to another exchange for daily trading and exiting.
The Market Could Use A Competitor
Coinbase will go the extra mile to draw their customers back if Robinhood begins gaining market share. And the cryptomarket would benefit as a whole, particularly if they promote lower fees and better service. As it currently stands, having only one major gateway serve the crypto market has become problematic. Consider how often big crypto price movements have prompted Coinbase to shut down. Not only does the market stall but the average investor cannot exit and becomes vulnerable to price drops.
Furthermore, additional exchanges are working on implementing USD gateways and pairings. Just this week, Bittrex announced that they will be offering USD pairings… and it appears that others will begin to follow in their footsteps.
Crypto traders probably won’t see major market shifts with Robinhood’s entrance into crypto trading. But if they succeed, expect other stock-based trading companies to begin offering cryptocurrency investment products. If nothing else, their move illustrates the extent to which the market has become well-established and ready for mass adoption.