Going Beyond Robinhood and Coinbase’s Retail Rush
Understanding crypto investments is more important now more than ever. Robinhood, the commission-free stock and crypto trading app, saw 6 times more cryptocurrency traders in Q1 than in the previous quarter.
But there’s more to the Robinhood-crypto frenzy than just the number of users. The brokerage, like so many financial services companies, has big plans for crypto. In this post, we break down what this means for the cryptocurrency world, and what new cryptocurrency investors can do to educate themselves.
Robinhood’s retail growth
In the last quarter of 2020, Robinhood had 1.7 million customers trading cryptocurrency. This was less than 10% of total customers. In the first quarter of 2021, the number of customers trading cryptocurrencies jumped to 9.5 million. This meant that over 45% of all Robinhood users trade cryptocurrencies. While the 6x growth is significant, there’s a lot more room to grow for Robinhood. This means the retail rush is only beginning.
Coinbase, the newly public cryptocurrency exchange, has 43 million users trading cryptocurrencies. In 2020, Robinhood’s total transaction volume was $350 billion, and it saw 4.3 million daily average revenue trades (DART). This was more than TD Ameritrade (3.9 million DART), Interactive Brokers (1.8 million DART), E-Trade (1.8 million DART), or Charles Schwab (1.1 million DART). However, Coinbase’s total trading volume was 27% higher than Robinhood’s, at $445 billion. With the retail rush just beginning, the discount brokerage could capture a bigger share of the market.
Robinhood’s cryptocurrency offerings cover seven coins – Bitcoin, Ethereum, Bitcoin Cash, Bitcoin SV, Litecoin, Dogecoin, and Ethereum Classic. In comparison, Coinbase covers 58 cryptocurrencies, in several trading pairs. This includes several DeFi coins like Aave, Compound, DAI, Uniswap, and more.
In its expansion plans, Robinhood could bring to its 20 million users access to other cryptocurrencies and DeFi coins. But is the brokerage looking to dive deeper into the cryptocurrency rush?
Robinhood’s crypto focus
In a press release, Robinhood’s head of operations Christine Brown had a lot more to say than just user growth. “As with our other products, our goal with Robinhood Crypto is to reduce barriers,” said Brown. The co-founders of the brokerage – Vladimir Tenev and Baiju Bhatt see cryptocurrencies as a tool that will help in “democratizing access to global payments.” Robinhood has tripled its cryptocurrency team and is looking to expand its crypto withdrawals and deposits.
Currently, Robinhood does not allow users to move their crypto out of the application. This means that you can buy, hold and sell crypto on Robinhood, but you can’t transfer it out. With crypto being at the “core” of their mission and the brokerage expanding withdrawals and deposits, this could be introduced soon.
From this two things are clear. First, the runway for Robinhood’s growth is enormous, both in cryptocurrencies it offers and users it acquires. Since its ecosystem already has a strong equity following, user transition to crypto within the same interface will likely be seamless. Second, Robinhood is focusing on cryptocurrencies. Not just with manpower but product features. Introducing withdrawals and deposits would result in several things – interoperability through wallets, access to a global market, and even linking DeFi (decentralized finance). This is a big deal.
Beyond Robinhood and Coinbase
The news around Robinhood’s user growth and crypto focus is exciting. The optimistic expectation of further growth and interoperability even more so. But what is more exciting is that the largest brokerage in the US is putting its weight behind cryptocurrencies. This means a flood of retail clients will be entering the cryptocurrency space. A space that is rife with volatility, and risks. In such a market education to ensure safe investing can be very helpful.
For new folks entering the cryptocurrency space, we’ve got a primer to help you get acquainted.
There are several cryptocurrencies to invest in. Coinmarketcap, a website that ranks cryptocurrencies by market capitalization lists over 9,000 coins. But the top two – Bitcoin and Ethereum account for nearly 70% of the total market.
Within cryptocurrencies, there are several types of assets. For instance, there are price-neutral stablecoins like USDT, USDC, and DAI. These are cryptocurrencies with a price roughly equal to the dollar. We’ve got a whole section of content on stablecoins.
Broadly we’ve identified four types of coins and tokens:
- Store of value cryptos – Limited supply cryptocurrencies (e.g.: BTC, LTC, LINK)
- Governance tokens – Tokens used to manage network governance (e.g.: MKR, LEND, COMP)
- Utility tokens – Use-case tokens used within a network (e.g.: ETH, XTZ, BAT)
- Value-Accrual tokens: Tokens used to generate value like earning yield (e.g.: UNI, SUSHI, BAL)
Cryptocurrencies are stored on digital wallets accessed by private keys. Wallets can be used on exchanges, third-party soft wallets, or external hard wallets.
- Exchanges: Exchanges act as indirect wallets for customers. The exchange holds private keys to wallets, and the customer gets an account within the wallet. Unlike brokerages, exchange wallets can be used externally. This means that cryptocurrencies on a Gemini wallet can be sent to a Coinbase wallet.
- Third-party soft wallets: Soft wallets are wallets connected to the internet. These can be created for free on Bitcoin.org or Blockchain.com. Specialized wallets like the Metamask and Trust Wallet can also be used. These applications do not offer direct buying and selling like exchange wallets. They only offer custody and transfer.
- External hard wallets: These are wallets disconnected from the internet like the Trezor and Ledger wallet. They are like hard drives accessed via a private key. Since they are disconnected from the internet, they offer higher security.
The cryptocurrency markets are risky. But the risk is not limited to the price, but also two other important aspects – credit and technology.
- Price risk: Price risk is the risk that comes with dealing with assets that are volatile. Bitcoin and the digital asset market is extremely volatile because it’s still in the early stage, regulation is tempered, and the technology is only being understood.
- Technology risk: Technology risk comes with not understanding the technology and using it incorrectly. Concepts like blockchain technology, smart contracts, price oracles, require some foundational understanding. These infrastructural points need to be understood to understand the underlying technology of cryptocurrencies. If security features like KYC and two-factor authentication is not understood, users can potentially send crypto to the wrong address and lose access to wallets.
- Credit risk: Because of the gray area of cryptocurrencies, there exists a lot of credit risk. This is the risk of putting your money in an asset that could potentially default. This tends to happen with smaller cryptocurrency projects and was a big problem in 2017-18 during the ring of initial coin offering (ICO) scams
Once you’ve understood the assets, wallets, and risks, it’s time to make a plan. We call this a crypto investment plan or a crypto investment thesis. This will help you understand why you’re investing in cryptocurrencies. The reasons could be plenty, but it all depends on you.
An investment plan will help you align investment to goals. This will help you avoid the noise and make better decisions.
A measured approach
With Robinhood’s and Coinbase’s users growing rapidly there’s going to be a wave of new crypto investors. These investors are going to be coming into the market when the digital assets space is evolving. From decentralized exchanges to yield farming, there’s so much going on.
We think it’s important to be educated. This will help keep your investment safe. For this, we’ve launched the Interaxis Academy, a resource to help you with cryptocurrency investments. We don’t provide any recommendations for cryptocurrencies or DeFi tokens. Our goal is to break down important topics in the digital assets space and you decide whether it fits your goals.
Get started with crypto investing through our course for investors.
We’ve got a course for financial advisors here.
Check out our videos on YouTube here.
Here are some articles that you might find interesting: