Robinhood Is Making A Long-Awaited Move

On Monday, Bloomberg News reported that Robinhood Markets Inc HOOD is making a long-awaited move as it is testing a crypto wallet feature for its app which would allow its customers to send and receive digital currencies.

The company's team is very much at work as evidence appeared in the software beta version of its Apple Inc AAPL-owned iPhone app in the form of a hidden image portraying a waitlist page for users to sign up for the feature, with the app having a code for cryptocurrency transfers as it's already possible for Robinhood customers to buy and sell popular cryptocurrencies, including Ethereum and Dogecoin along with bitcoin.

But this time, they will be able to manage all of their crypto holdings through a wallet in the app, without converting them into dollars. Its industry peers such as Coinbase Global Inc. COIN already offer their own crypto wallets which offer a single place for customers to store all virtual currencies which are protected by a private key.

Crypto Wallet Is A Priority

On the latest earnings call, CEO Vlad Tenev already mentioned that this feature is a priority for the company's developers. However, being able to deposit and withdraw cryptocurrencies on a large scale is complex the company wants to make sure the process is done correctly.

He didn't disclose any dates regarding the launch, but the support and testing in its app suggest a debut could be in the near future.

Second Quarter Earnings

During the quarter that ended in June, revenue more than doubled to $565 million due to a massive surge in crypto trading. They surged more than 131% in the period from $244 million a year ago.

Crypto trading alone brought $233 million to the revenue table which is more than half of all the transaction-based revenue of $451 million. Cryptocurrency's share of revenue jumped from the first quarter's 17% to more than 51%.

Unfortunately, the bottom line was a net loss of $502 million, or $2.16 per share. Costs that arose from the change in fair value of convertible notes and warrant liability took out $528 million from equation whose end result was significantly different compared to a profit in the same quarter last year.

Outlook

When it announced its latest results, the company also warned of seasonal headwinds and lower trading activity across the industry that it expects to result in lower revenues for the quarter that will end on September 30^th, 2021, along with considerably fewer new funded accounts compared to the June quarter.

There is also the volatility of crypto to consider as the company makes money on this front by routing orders to market makers that the company claims to offer "competitive pricing". Its revenue is the percentage of the order value and regulators are already questioning this model.

Regulatory Hurdles

Regulators are questioning Robinhood's controversial pivot into cryptocurrency markets. As a result, the company paid a $65 million penalty to the SEC in part for failing to satisfy its duty of "best execution". U.S. lawmakers are questioning the SEC about when it intends to place further restrictions around the practice, so Robinhood shareholders are bound to get nervous as they wait for the outcome.

But even if the practice does not get altered, the question arises as to how much can Robinhood grow if it's limited to the U.S., considering that expanding to markets like the U.K. or Europe would imply abandoning the zero-commission model.

The Verdict – Risk Could Outweigh The Reward

Robinhood's shares have had a wild ride since it the company's NASDAQ debut at the end of July. Democratize the market for amateur investors is a big deal as technology is constantly changing the way consumers purchase goods and services but app-based investing has a much stronger impact on young people's finances. Robinhood did a great job by plugging in tens of millions of first-time investors into the financial markets through their smartphones in a simple and user-friendly way.

It deservedly became the poster child of this revolution. Despite the latest report quarter which portrayed strong results, the question is how long can the good times last as the company is facing an increasing amount of regulatory hurdles which could easily result in the risk outweighing the rewards.

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