Robinhood‘s (HOOD) second-quarter earnings report late Wednesday revealed its reliance on cryptocurrency trades, highlighting the benefits and potential pitfalls of dealing in the emerging asset class. Robinhood stock fell.
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The trading platform’s cryptocurrency-related revenues exploded during the quarter. The company logged $233 million in such revenue, compared to just $5 million a year ago. More than 60% of Robinhood’s funded accounts traded in crypto during the quarter.
The period was the first where a bigger portion of new customers made their first trade in crypto rather than equities, Robinhood said. Dogecoin, the meme-based cryptocurrency that was started as a joke, made up 62% of Robinhood’s crypto trading volume during the quarter and a big chunk of its sales.
The revenue from crypto trades dwarfed the amount from stock trades, which fell 26% to just $52 million.
Similar to cryptocurrency exchange Coinbase (COIN), Robinhood is also putting more focus on adding new crypto products to serve what has been a surge in interest in the digital assets in the pandemic era.
“We’re working on rolling out new crypto features, such as more coins, recurring investments, the ability to deposit and withdraw your crypto,” CEO Vlad Tenev said on Robinhood’s earnings call. “We’re excited about the future of our crypto product.”
He also noted that the company had to expand its staff to match the rise in crypto enthusiasm. He said Robinhood was working on providing access to a crypto wallet for the platform. But he said there were challenges that would come with rolling one out.
“Of course, offering crypto wallets and the ability to deposit and withdraw our cryptocurrencies is tricky to do at scale,” he said. “We want to make sure it’s done correctly and properly.”
Robinhood Stock, Bitcoin Stocks
Robinhood’s second-quarter results overall beat expectations. But Robinhood stock tumbled on Thursday. The trading platform, citing “seasonal headwinds,” said lower industrywide trading activity would push revenue and new accounts lower in the third quarter.
Management said the volatility in cryptocurrencies made forecasting difficult. Wolfe Research analyst Steven Chubak, who covers Robinhood stock, said that Dogecoin accounted for around 26% of Robinhood’s second-quarter revenue.
“HOOD’s growth within Crypto is nothing short of remarkable, but the outsized contribution from DOGE simply cannot be ignored,” he said in a research note on Wednesday.
“With DOGE volumes tracking down ~80% (quarter over quarter), and app downloads tracking down ~80% versus the (year-to-date) pace . . . we believe the 3Q slowdown could be much more acute than many investors were anticipating,” he continued.
Similarly, Coinbase last week forecast lower trading volume and active users for the third quarter. Coinbase said the prices of digital assets, along with their volatility, had “declined significantly relative to Q2 levels.”
Robinhood stock closed down 10.3% at 44.69 in the stock market today. Charles Schwab (SCHW) fell 1.3%.
The price of Bitcoin was up 3.4% to $46,508. Among other Bitcoin stocks, Coinbase rose 1.6%. Marathon Digital Holdings (MARA) gained 3.35%. Microstrategy (MSTR) rose 3.2%. The Grayscale Bitcoin Trust (GBTC) jumped 6.3%.
Bitcoin and other cryptocurrencies have attracted a flood of interest over the past year, as worries increased over the state of traditional currencies and others looked to take advantage of the crypto world’s searing price gains.
Support from Tesla (TSLA) CEO Elon Musk, Ark Invest’s Cathie Wood and big companies like PayPal (PYPL) and Mastercard (MA) have nurtured mainstream adoption.
But the price of Bitcoin fell earlier this year, as China cracked down on crypto-related activity. Tesla, which briefly accepted Bitcoin as a payment form, later halted such purchases. Musk cited concerns about Bitcoin’s energy usage.
Other difficulties lie ahead for companies looking to move into the crypto world. Mastercard earlier this year said not all cryptocurrencies would be accepted on its network, due to reliability and security concerns.
Expansion, Competition
Other observers have questioned whether the pandemic-induced retail trading boom would hold up, after trading restrictions angered some Robinhood traders earlier this year and the economy’s reopening gives people more to do. Some have noted that Robinhood’s crypto business has plenty of rivals.
“Robinhood’s crypto trading capabilities are not a reliable growth driver for its future because there is too much competition in crypto trading,” David Trainer, CEO of the investment research firm New Constructs, said in an email ahead of Robinhood’s earnings.
“Dependence on crypto only makes the HOOD business model more risky and volatile,” he added Thursday in a follow-up email.
Still, even with the unpredictable movements in the price of Bitcoin, Robinhood said market turbulence was on its side.
“The other thing that we benefit from over time is volatility,” Robinhood CFO Jason Warnick said during the earnings call on Wednesday.
“There have been several moments of pretty notable volatility in the markets, not just in equities, which is mostly in Q1, but also with crypto, which is in Q2, (and this) makes it incredibly difficult to predict when those moments will continue or happen again,” he continued. “But when they do happen, Robinhood tends to have an outsized benefit from that, a really strong tailwind.”
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