Robinhood is a trading platform that is gaining a lot of relevance in the US. The reason is that it does not charge commissions for deposits, withdrawals or trading operations, which is not at all usual in the sector. And now he has decided to enter the cryptocurrency market with a groundbreaking proposal.
Let's analyze what Robinhood is, what operations and prices are available and what it proposes with its new Crypto plan. We tell you that it is very interesting and that Coinbase, Binace and similar should fear this new competitor.
Robinhood, business model
The premise behind Robinhood is that all citizens should have cheap access to financial markets and therefore, where it operates (basically in the US and Australia) allows to invest in the stock market without paying commissions.
Therefore, if someone lives in the US and opens an account in Robinhood you can transfer money to that account for free, buy and sell shares for free and withdraw the money also for free. There is an exception, and they are the so-called canon of the stock market. That is, stock exchanges around the world are companies whose main income comes from the rates they apply when executing purchase orders. No matter which broker or bank is operated, these fees must be paid.
In the case of the US, the fees for the stock exchange are quite low: there is no in the case of buying shares and in the sale they are 0.00231% of the amount of the transaction. On the other hand, in other bags, these amounts tend to be higher. For example, in Spain there is a minimum of 1.21 euros for operations of less than 300 euros (adding canon and clearing commission) and can be higher depending on the volume of the operation. So if Robinhood gets to expand to other countries (like Spain) the thing is not so low. From Robinhood you can invest in foreign stock exchanges, not only in the US. and there the rates are more conventional (for example 50 dollars per purchase transaction).
Anyway Robinhood has incredible national rates. If we compare it with a powerful broker in Spain, such as Renta4, we see that investing in the stock market is not cheap: the transaction fee is 4 euros, more fees (already mentioned above), and there is a share custody commission 0.033% plus VAT with a minimum of 1.25 euros per month for custody value. All this in Robinhood is free (except for the fees that are charged in any broker).
Where does Robinhood get money from? What is your business model? They assure that it is to invest the money that the clients have without using in their accounts, as any bank does. But with the interest rates that there are currently, I doubt that this is their main source of income. Your business is to allow your clients to invest leveraged.
Investing leveraged means investing with debt. This sounds dangerous and it is, since the losses can be very bulky. The good thing is that if there are profits they multiply. For example, if someone invests 10,000 euros in one share and has a revaluation of 10%, they will earn 1,000 euros. But if that same person gets someone to lend him 990,000 euros to make the same investment, along with the 10,000 available, his profit is multiplied. That is, it invests 1,000,000 euros, earns 10% as before (which in this case is 100,000 euros), returns the 990,000 euros and the interest charged and the profits are spectacular. The problem is that when the investment is not going well and everything is lost.
Robinhood offers leverage very easily. That is, it offers its clients borrowed money to invest with debt and multiply the potential profits. For this purpose, it offers interesting flat rates instead of an interest rate on the borrowed capital and also offers monthly plans (Gold) to increase the possibilities of leveraging. This is very dangerous and only suitable for professional investors and is probably the main source of income for the platform. In other words, Robinhood's business model is to lend money to her clients to invest with debt. And of course, for lending that money charges.
Robinhood in the market of cryptocurrencies
Robinhood recently announced its entry into the cryptocurrency investment market, specifically in Bitcoin and Ethereum with the possibility of expanding to others. At the moment it is in a closed beta but they have a web to sign up.
The great advantage they offer is that they allow operating in cryptocurrencies without commissions, a thing never seen before. Buy and sell without cost, and not custody of cryptocurrencies. Of course, it has some limitations such as not allowing (for the time being) to transfer cryptocurrencies to other exchanges or purses and that also do not allow receiving cryptocurrencies.
In the case of cryptocurrencies, they do not allow leveraged purchases or use the funds as collateral for leveraged operations in the stock market. It is therefore difficult to see how they will make money with this service if, as they promise, they do not use differences in purchase prices to have a margin. The logical thing will be that in the future they allow leveraged operations, but the conditions will be harder than in the stock market due to the high volatility.
Rate comparison with other exchange
What is spectacular is the comparison of rates with other popular exchanges, such as Coinbase and Binance. Robinhood offers rates never seen before and impossible to overcome. If in the future they expand outside the US, of course, many exchanges will have a difficult time competing.
We will see in the future how the exchanges adapt to the new competitor but of course they have something to do, otherwise they will lose many customers.