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Investing app Robinhood (HOOD) said Wednesday it will provide a crypto wallet for customers, letting them send and receive crypto assets off its platform. Officially live in early 2022, the service gives an entirely new set of retail investors keys to the crypto sector. With this added access comes risks for customers and the chance the company is changing how users interact with its platform.
The announcement comes after reports that Robinhood is publicly beta testing a wallet service, something customers have requested over the past year.
Almost all cryptocurrency exchanges allow customers to transact on and off their platform. Robinhood still hasn’t given that functionality to customers. Unlike ACH bank transfers for fiat currencies, crypto transactions place greater responsibility on users because blockchain-based transactions are permanent. Most exchange-based wallet services offer a copy/paste feature that reduces mistakes in sending “on-chain transactions.” However, misplacing just one digit in a wallet address during a crypto transaction sends a user’s money to the wrong address permanently.
“A lot of our crypto customers are new to crypto and haven’t actually transacted on-chain,” Christine Brown, Robinhood Crypto’s Chief Operating Officer told Yahoo Finance. “We spent a lot of time working on our safety features and wanted to make sure that our experience is up to par with what our customers would expect.”
A crypto wallet allows users to send and receive cryptocurrency to and from other wallet addresses. Previously, Robinhood held all its customers' cryptocurrency and users could not take their holdings off the platform.
The wallet service comes as Robinhood rolls out more crypto trading features, such as the ability to place recurring buy orders to dollar cost average into a coin, a strategy that helps investors reduce volatility. Brown said Robinhood is looking to add more crypto assets “for later this year and into 2022.”
Shares of Robinhood have declined steadily since spiking at the beginning of August. The stock is now at $42, about 21% higher than its July IPO close.
A crypto wallet using 0% transaction fees
Similar to how it treats stock trading on its platform, Robinhood doesn’t charge fees for buying and selling crypto. Paired with a digital wallet, the company is looking to use 0% transaction fees 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) then send it off the platform,” said Brown. "We have a healthy ambition to bring a whole lot of crypto benefits to our users. This is just the start."
In the last year, hiring on the company’s crypto side quadrupled to about 80 employees. One reason is because crypto is becoming a major source of revenue for the company. Details from Robinhood’s latest earnings release showed 60% of customers bought or sold crypto in the previous quarter and for the first time ever, more new customers placed their first trade in crypto rather than equities. The report also showed that Robinhood's revenue from cryptocurrencies increased to $233 million in the second quarter, up from $5 million in Q2 2020. Robinhood reported 21.3 million people actively use the platform for trading.
Getting more heavily involved in the crypto sector allows Robinhood to access potentially billions of dollars flowing through the more than $2 trillion asset class, but it also exposes the company and its customer base to greater risks, said Collin Plume, CEO and founder of the crypto IRA investment platform, MyDigitalMoney.
“If the tax reporting of crypto coming in and out is not tracked appropriately, it does expose them to a potential liability. It also exposes them to potential ransomware attacks for clients and themselves,” said Plume. "Overall, it is worth the risk for this company and they have always been willing to take risks to grow."
Plume also claimed that to say Robinhood receives no commission on its trading is misleading because "there is no way a business can run without any profit."
The question of Robinhood's revenue
How Robinhood can generate profit without charging commissions is a hotly debated topic. Ultimately, a major chunk of its revenue comes from the equities brokerage model that Robinhood used to pioneer 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 each time customers buy and sell a stock and are paid by those market makers according to 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 encourages the quantity of customer trades above all else.
In its July IPO filing, Robinhood reported just how important the brokerage model is to its business, saying its revenue tripled to $959 million from 2019 to 2020, with three-quarters of that money coming from rebates it earned sending orders to market makers through payment of order flow.
David Keller, Chief Strategist at the financial charting company, StockCharts suggested a simpler reason for why the crypto is also so great for the platform's business.
“Market corrections tend to be a tailwind for brokers as customers are motivated to trade as volatility increases,” said Keller.
Robinhood maintains that the PFOF model gives customers best execution of orders at market price, saving them the commission fee. Since the Reddit-driven meme stock frenzy at the beginning of the year when Robinhood was forced to halt trading due to heightened liquidity requirements in stocks like GameStop and AMC, details about the business model came to light, causing some customers to leave the platform. Robinhood now discloses how it makes money on its website.
“Because of payment for order flow, the customers are their real product,” said 20-year-old Maverick Lewis. A college student who previously used Robinhood to trade cryptocurrencies and stocks, Lewis cashed out all his crypto holdings on Robinhood several months ago to open an account with Coinbase and buy it all back again.
A crypto wallet feature on Robinhood would have saved Lewis fees, time and a potential tax headache but Lewis said he’s not going back to the platform because the business model “doesn’t value customers.”
While the market structure between equities and crypto is not the same, some crypto exchanges also use PFOF in combination with charging commission fees.
David Hollerith is a senior reporter covering the cryptocurrency and stock markets.