Robinhood is a trading platform that is gaining a lot of relevance in the US. The reason is that it does not charge commissions for deposits, withdrawals or trades, which is not at all usual in the sector. And now they have decided to enter the cryptocurrency market with a groundbreaking proposal.
Let’s analyze what Robinhood is, what trades and prices are available and what it proposes with its new Crypto plan. It is very interesting and Coinbase, Binance and others should fear this new competitor.
Robinhood, business model
The premise behind Robinhood is that all citizens should have cheap access to financial markets and therefore, where it operates (basically in the US and Australia) it allows users to invest in the stock market without paying commissions.
Therefore, if someone lives in the US and opens an account in Robinhood you can transfer money to that account for free, buy and sell shares for free and withdraw the money also for free. There is an exception, and they are the so-called canon of the stock market. That is, stock exchanges around the world are companies whose main income comes from the rates they apply when executing purchase orders. No matter which broker or bank is operated, these fees must be paid.
In the case of the US, the fees for the stock exchange are quite low: there are none in the case of buying shares and in the sale they are 0.00231% of the amount of the transaction. On the other hand, in other stock markets, these amounts tend to be higher. From the Robinhood app, you can invest in foreign stock exchanges, not only in the US. and there the rates are more conventional (for example $50 dollars per purchase transaction).
Where does Robinhood get money from? What is its business model? They say that it is to invest the money that the clients have without using their accounts, as any bank does. But with the interest rates that there are currently, I doubt that this is their main source of income. Their main business is to allow clients to invest with leveraged positions.
Investing leveraged means investing with debt. This sounds dangerous and it is, since the losses can be very bulky. The good thing is that if there are profits, they multiply. For example, if someone invests $10,000 in one share and has a revaluation of 10%, they will earn $1,000. But if that same person gets someone to lend him %990,000 to make the same investment, along with the 10,000 available, his profit is multiplied. That is, he invests $1,000,000, earns 10% as before (which in this case is $100,000, returns the $990,000 and the interest charged and the profits are spectacular. The problem is that when the investment is not going well – everything is lost.
Robinhood offers leverage very easily. That is, it offers its clients borrowed money to invest with debt and multiply the potential profits. For this purpose, it offers interesting flat rates instead of an interest rate on the borrowed capital and also offers monthly plans (Gold) to increase the possibilities of leveraging. This is very dangerous and only suitable for professional investors and is probably the main source of income for the platform. In other words, Robinhood’s business model is to lend money to its clients to invest with debt. And of course, for lending that money charges interest.
Robinhood in the market of cryptocurrencies.
Robinhood recently announced its entry into the cryptocurrency investment market, specifically in Bitcoin and Ethereum with the possibility of expanding to others. At the moment it is in a closed beta but they have a form for sign up.
The great advantage they offer is that they allow trading in cryptocurrencies without commissions, a thing never seen before. Buy and sell without cost. Of course, it has some limitations such as not allowing (for the time being) to transfer cryptocurrencies to other exchanges.
In the case of cryptocurrencies, they do not allow leveraged purchases or use the funds as collateral for leveraged operations in the stock market. It is therefore difficult to see how they will make money with this service if, as they promise, they do not use differences in purchase prices to have a margin. The logical thing will be that in the future they allow leveraged operations, but the conditions will be harder than in the stock market due to the high volatility.
What is spectacular is the comparison of rates with other popular exchanges, such as Coinbase and Binance. Robinhood offers rates never seen before and impossible to overcome. If, in the future, they expand outside the US, of course, many exchanges will have a difficult time competing.
We will see in the future how the otherÂ exchanges adapt to the new competitor, but of course they must, otherwise they will lose many customers.