Why a crypto exchange might want to buy Robinhood

Selling your company — or not selling your company — is a complicated decision. Price, timing, pride and a host of other factors play into the decision. Hell, you might simply enjoy running the business, be it a startup, unicorn or public-market behemoth.

Sometimes the decision is made for a company’s leadership team. Zendesk’s work to avoid selling itself only to later acquiesce at a lower price is one such example. Twitter, which is in the process of a messy sale to Elon Musk, is another.

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All the above has been on our mind as Sam Bankman-Fried, the CEO of crypto exchange FTX, circles Robinhood. After securing a material stake in the business, he denied active talks to buy the U.S. zero-cost broker. Robinhood itself stressed the fact that its founders have voting control of the business, meaning that the choice to sell or not is theirs alone. We’ll see about that.

But why would a crypto exchange be even interested in buying Robinhood? After bouncing the issue around my head since the news somewhat broke yesterday that Robinhood might be in play, I’ve come up with an explanation. Let’s talk about it.

The user question

While the era of rapid user growth at Robinhood is behind it for now, it retains a material user base. As its Q1 earnings showed, the U.S. consumer fintech closed the first quarter with 22.8 million “net cumulative funded accounts,” up 100,000 from Q4 2021 and 4.8 million on a year-over-year basis.

Is that lots of folks? Yes, it is.

While it is hard to draw direct comparisons to other consumer financial technology companies, we can do a little bit of directional work. Coinbase, for example, had 9.2 million “monthly transacting users,” or MTUs, in the first quarter. Now, we cannot directly compare net-funded accounts with monthly active traders. However, it’s fair to note that we expect MTUs to work out to a fraction of net funded accounts. Because Robinhood has net funded accounts that are a multiple of the Coinbase MTU figure, it’s clear that Robinhood is large, at least in terms of active American crypto accounts.

That’s a busy way of saying that Robinhood’s funded account number would be a huge help to any crypto company looking to snag some U.S. market share.

Yeah, but…