Robinhood’s decision to limit crypto trading makes good sense

Consumer trading and investment app Robinhood is moving to restrict the holding and trading of certain major cryptocurrencies on its platform, barely a week after the U.S. Securities and Exchange Commission’s lawsuits against crypto exchanges Binance and Coinbase. The platform told Congress earlier this week that it was examining its crypto offerings following the lawsuits.

There are two easy perspectives one can have in the wake of Robinhood’s decision to end support for tokens from the Polygon, Solana and Cardano blockchains: That the company is being too skittish, or that it’s making a calculated business decision.

After reviewing Robinhood’s most recent quarterly results, we feel that the decision is backed by some amount of reason.

Robinhood is not new to being poked by the government. During the meme-stock mania, the company was dragged before Congress to be questioned about its trading controls and its willingness to offer sophisticated trading tools to less sophisticated investors. Given this less exciting asset trading market, the company is likely loath to invite renewed interest from regulators and lawmakers.

But that is just one piece of the puzzle. Robinhood only needs to do a simple risk-reward calculation: It’s likely that the company simply doesn’t derive enough revenue from consumers trading these tokens to take the effort to defend them.

Robinhood did not immediately respond to a request for comment.

Let’s look at Robinhood’s Q1 2023 results to get a better idea. Observe the following historical breakdown of the company’s transaction revenues:

Image Credits: Robinhood

Back in 2021, crypto trading generated nine figures of revenue. That quickly fell to eight figures later that year and has declined further since that bubble popped.

In the first quarter of 2023, crypto transactions accounted for just about 18% of the company’s transaction revenue of $207 million. Crypto is simply not that big a business for Robinhood today, and the trading of lesser-known tokens like Cardano (compared to Bitcoin and Ether) is only a fraction of an already minor figure.

If you’re wondering how much major tokens like Bitcoin and Ether are traded on the platform versus their smaller peers, the company’s latest 10-Q filing gives us some information:

Image Credits: Robinhood

The three tokens that Robinhood has decided to end support for fall into the ‘Other’ category, indicating that they are likely not critical to its crypto trading incomes. How hard does Robinhood want to fight to hold on to a small portion of an already diminished revenue stream?

Robinhood’s decision answers that question clearly: Not much.

What about crypto exchanges?

In the wake of the Coinbase and Binance suits, how much revenue will crypto exchanges have to give up if they decide to stop trading in tokens apart from Bitcoin and Ether? Coinbase’s Q1 2023 results provide some context.

In the first quarter of 2023, Coinbase reported transaction-based revenues of $374.7 million. Here’s the breakdown of how various coins contributed to that number:

Image Credits: Coinbase

Tokens that are not Bitcoin or Ether accounted for 45% of Coinbase’s trading volume in the first quarter and a similar 46% of its total transaction revenue.

If Coinbase is forced to retreat to just those two cryptocurrencies, it would still see hundreds of millions in transaction revenue every quarter. The company could survive with a smaller cost base.

But you can see why Coinbase is battling the SEC more than Robinhood: Transaction revenue from crypto accounted for more than half its quarterly top line. It cannot afford to lose that much, so Coinbase is going to war while Robinhood steps back. Both choices are rational from a business perspective.

Hell, if Coinbase wins, then Robinhood can relist the three tokens it is dropping while earning kudos with regulators for being cautious. That’s a win-win.

Robinhood’s decision today, while surely irksome to some of its customers, simply makes sense.