Cryptocurrency appears to be heading mainstream. With the flotation of Coinbase and rumours of a future Ripple IPO, it seems as though a watershed moment for crypto is taking place. Now, with the imminent arrival of Robinhood, an investing app that combines assets like Bitcoin, Ethereum and Dogecoin with traditional stocks, investor exposure to digital finance has never been bigger.
However, following its listing in mid-April, Coinbase shares have faltered as the wider cryptocurrency market entered a period of decline.
As the chart above shows, Coinbase is trading at around 26.4% lower than its entry price on the Nasdaq. Although Coinbase shares have shown signs of recovery since going public, the volatility of the wider cryptocurrency market has sent the value of the company falling in recent weeks.
In the first quarter of 2021, 9.5 million users traded cryptocurrencies on Robinhood, showing that the investment platform is firmly rooted in the world of digital finance. So, will the platform’s flotation also be subject to such extreme volatility? Let’s take a deeper look into why Robinhood may be spared the same challenges:
Exploring Robinhood’s IPO
The timing of Robinhood’s IPO is curious. The company has rarely strayed from the headlines throughout 2021, with the app playing a key role in the short squeeze of GameStop shares in January and drawing criticism from Wall Street icons Warren Buffett and Charlie Munger in the process.
Although the platform has earned the disdain of leading figures in the industry, it’s also been criticised by the retail investors it serves for restricting trading options in certain stocks and crashing during periods of high activity.
Despite a tricky start to 2021, Robinhood outperformed many of its trading counterparts in terms of downloads in recent months – including the embattled Coinbase.
In fact, Robinhood has become one of the fastest-growing fintech startups, as well as one of Silicon Valley’s most valuable unicorns. After its most recent round of fundraising in September 2020, generating $660 million, the company obtained a valuation of $11.7 billion.
The platform also has some esteemed backers, including Sequoia Capital and Andreessen Horowitz, NEA, Kleiner Perkins and GV. While CNBC estimates that Robinhood’s value at IPO may leap at least three-times higher than last year’s $11.7b valuation, Fortune reported in March that it expects Robinhood to reach a value of $50 billion.
With such a significant volume of downloads occurring in the wake of the COVID-19 pandemic, optimism is clearly high for Robinhood and its expanding userbase.
The Go To App For Retail Investors
One key reason why Robinhood may be spared the levels of volatility that we’re seeing with Coinbase can be found in the platform’s target market: individual retail investors.
Significantly, Robinhood recently announced that the app’s users can buy into its upcoming IPO – a gesture that’s usually reserved for institutional investors with deeper pockets. This can be seen as a clear nod to the app’s burgeoning user base of casual investors operating with smaller account balances.
As the table above shows, the average account size of Robinhood users is minuscule in comparison to that of E-Trade, Freedom24, TD Ameritrade and Charles Schwab. Despite attracting users with smaller account balances, Robinhood has mobilised an army of individual retail investors who have turned to trading for the first time during the pandemic.
According to Maxim Manturov, head of investment research at Freedom Finance Europe, “what we have analyzed actually looks like the consequence of the pandemic and the stimulation packages that followed. This created a pool of funds retail investors could start investing into stocks. As per Fidelity report, there were 26M retail accounts in 2020, i.e. up 17% compared to 2019, while the daily trading volume doubled.”
It appears that this new observable pool of funds that retail investors are using to place into stocks and shares for the first time is largely being spent via Robinhood, and other apps that have led the download charts throughout 2020 and 2021 so far.
This means that while the likes of Coinbase finds itself at the mercy of the cryptocurrency market and the volatility that’s capable of forcing mass purchases and sell offs of assets like Bitcoin, Ethereum and Dogecoin, Robinhood will be characterised by welcoming new and inexperienced investors ahead of its rivals and providing them with a platform for purchasing stocks and shares across a wider range of markets.
Although the rise and fall of cryptocurrency and traditional markets will affect the volume and direction of trading withiin Robinhood’s platform, this steady stream of new small scale investment can help to ensure that money leaving the app is replaced by a new account holder quicker – generating an operating model that may be a source of greater comfort for investors.