Robinhood Warns About Potential for Significant Decline in Retail Trading, Particularly in Crypto Business

Robinhood Markets Inc. has warned of a potential decline in trading revenue and new clients as the boom in retail investing begins to slow down. The US investing and trading platform is expected to go public as soon as next week.

 “We expect our revenue for the three months ending September 30, 2021, to be lower, as compared to the three months ended June 30, 2021, as a result of decreased levels of trading activity relative to the record highs in trading activity, particularly in cryptocurrencies, during the three months ended June 30, 2021, and expected seasonality,” Robinhood stated in an amended prospectus released Monday.

According to its prospectus, Robinhood estimates the revenue of Q2 ended in June 2021 to range between $546 million and $574 million. This would increase 129% from the $244 million in the Q2 of 2020. However, the firm estimates a net income loss between $537 million and $487 million in the Q2 of 2021, compared with a $1.4 billion loss in Q1.

Robinhood, which provides cash management accounts and crypto, equity, and options trading, benefits more from speculative trading activities from its customers. 

The company further mentioned that while options trading contributes about 38% of its total revenue, crypto trading accounts for 17% of the revenue. The firm also acknowledged that the levels of its stock and margin lending trading had increased this year.

However, as RobinHood is heading toward its public debut within the next few weeks, a stagnation in crypto, options, and margin trading could hurt its growth.   

The firm stated that it expects the growth rate of its new customers to decline in the third quarter that ends in September 2021, compared to the second quarter because of a potential decline of interest in crypto trading.  

Robinhood Crypto Trading

Early this month, Robinhood filed a preliminary prospectus with the US Securities and Exchange Commission (SEC) for its initial public offering (IPO).

The firm lists crypto trading through its subsidiary, Robinhood Crypto LLR, as one of the offerings on the Robinhood platform. Robinhood, which provides commission-free selling and buying of crypto assets through the subsidiary, launched its crypto trading services in February 2018.

Currently, the platform supports seven crypto tokens, including Bitcoin, Ethereum, Dogecoin, Litecoin, Ethereum Classic, Bitcoin SV, and Bitcoin Cash. This year, Robinhood held crypto assets worth almost $11.60 billion in assets under custody for the first three months.

The filing details indicated that 17% of the company’s total revenue was generated from transaction-based revenues earned from crypto transactions, compared to 4% from the three months ended December 2020.

However, the company now expects a decline of interest and adoption of crypto assets, which would lead to declined customer interest on its platform in the third quarter, adversely affecting its earnings.

The booming yet controversial Robinhood trading app plans to raise $2.3 billion in the upcoming initial public offering. The company, which plans to list on the Nasdaq public stock market under the ticker symbol “HOOD,” expects selling shares for between $38 and $42 apiece.

That would translate the market valuation of Robinhood between $27 billion and $35 billion. And that would make the firm more valuable than about two-thirds of the S&P 500, putting it somewhere between HP, Corning, and Yum Brands.

Robinhood is poised to become a hot IPO because it proliferates as retail investors get attracted to the stock market boom.