What's Happening at Robinhood?

And will it become the next great crypto exchange?

Over the past year or so, Robinhood has begun to lean hard into growing its crypto business. We can see evidence of this in its increased listings of crypto assets, CEO Vlad Tenev’s media appearances, and even the company’s M&A activity.

Why might this be? And furthermore, is Robinhood actually well-positioned to become a leading regulated crypto exchange? Here’s my take.

Business Fundamentals

Robinhood’s stated mission is to serve the active trader. Few markets are more active than crypto: it has the greatest set of trading hours (24/7) and probably the fastest asset creation process.

Yet today, Robinhood supports trading in just 21 crypto assets. That’s fewer than what Coinbase offered in 2019! It seems reasonable that crypto would stand out as a bright spot for potential growth. This is now doubly true given the anticipated crypto friendliness of the new administration.

Robinhood’s distribution could provide a powerful lever for growing into this market. Approximately 24M customers have funded accounts on the platform. About half of those trade monthly. That’s several million more than Coinbase, which in recent quarters reported 7-8M monthly trading users.

Could Robinhood effectively activate its user base – e.g. get a third of their funded customers to trade crypto, or two thirds of their monthly active traders – they’d very quickly become one the largest crypto trading platforms (by users). Again, at face value, certainly seems like an attractive opportunity.

Is Crypto Valuable for Robinhood to Pursue?

Robinhood’s business is structured such that each dollar deposited to the platform has the ability to impact multiple revenue lines. For instance, consider a user that deposits cash to buy a security. Robinhood makes money when the user both buys and sells that asset. They can also make money if a user opts to lend that security. In this way, Robinhood monetizes the entire lifecycle of the asset purchase.

In the example above, a dollar deposited to Robinhood impacts two revenue streams (equities transaction revenue and securities lending). Users may also take their share of revenue earned via securities lending and store it as cash (earning interest) or re-invest it in another asset. Both contribute to Robinhood’s top line.

Today, it’s not clear that crypto trading has the same amplification effect. As far as I can tell, a dollar deposited with the intent to trade crypto only generates revenue via transaction fees.

A first-order motivation for expanding the crypto business might simply be to get more dollars on the platform. Even just expanding the one revenue line is highly lucrative. In recent quarters, crypto trading drove nearly double the transaction revenue of equities – despite trading volumes being 10-20x smaller, and despite the small number of assets listed.

Looking toward the future, it stands to reason that if extending utilization of assets has historically been Robinhood’s bread & butter for growth, they’ll seek to do the same with crypto assets. There are clear playbooks for doing so (e.g. via staking those assets). Tenev has also become increasingly vocal about the potential of DeFi. I wouldn’t be surprised if we see Robinhood make dedicated efforts to move more and more onchain (especially now that best-in-class cybersecurity services are available to help protect users).

So, Will Robinhood be the Next Great Crypto Exchange?

Robinhood has the building blocks in place to become one of the largest venues for retail users to trade crypto. But the term “exchange” actually seems a misnomer. Robinhood is a platform that connects order flow to underlying exchange infrastructure, but (to my knowledge) it doesn’t actually operate the matching or settlement engines.

Robinhood’s announced acquisition of Bitstamp – a crypto exchange – suggests it may intend to move down the stack. But again, Robinhood’s bread & butter is a) distribution, and b) extending utilization of the assets on its platform. The atomic unit of growth is the funded account. Running an exchange is an entirely distinct business, with distinct operational capabilities, from the Robinhood of today.

So in sum, Robinhood does seem primed to become one of the next great crypto trading platforms. Its existing distribution, track record of execution, and focus on serving the active trader all support this notion.

My guess is that the company will find the most success by leaning into consumer-facing crypto products rather than expending efforts to build down the stack. It’s my hope as well. In the broader crypto ecosystem, we are seeing innovation across all layers of the stack – from front-ends to orderbook infrastructure to institutional-grade staking products. Crypto is modular and composable by design. Should Robinhood choose to focus on the more consumer-facing elements of its crypto business, it could essentially plug and play the best of the underlying infrastructure products for servicing its active users. Whether that’s indeed the route they ultimately choose will, I think, signal a lot about the company’s potential success in crypto.

Irregardless of the path they choose, what is clear is that Robinhood is reinvesting in crypto in a big way. Overall, that seems poised to be a win-win-win – for the crypto ecosystem, for users, and for Robinhood.