Robinhood Too Reliant on Dogecoin? Large Percentage of Revenue Puts Online Discount Brokerage at Risk

Last Updated on August 22, 2021

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Robinhood Markets Inc. (NASDAQ: HOOD), which went public last month, may have a Dogecoin problem. Or to be more exact a percentage problem.

After going public, Robinhood was required to file a quarterly earnings report with the Securities and Exchange Commission on August 18. It revealed that its revenue over the second quarter from crypto transactions came to $233 million, which was 52% of all its transaction based revenue. It also said that 62% of its crypto revenue over the quarter came from dogecoin. 

The New Customers Want Cryptos

Arithmetically, this implies that roughly 32% of Robinhood’s transactional revenue came from dogecoin, an outlier crypto that began life as a joke. If Robinhood has become dependent on doge to the extent that number suggests it could be putting itself at risk. 

The company’s namesake app offers seven tradeable coins. Aside from Dogecoin these are:  Bitcoin, Bitcoin Cash, Bitcoin SV, Ethereum, Ethereum Classic, and Litecoin. Robinhood’s new filing said that a larger share of its new customers placed their first trade on cryptos than on equities.

In the Risk Factors section of the 10-Q, Robinhood revealed that “the prices of cryptocurrencies are extremely volatile. Fluctuations … could negatively impact trading volumes of cryptocurrencies, which would adversely affect the success of RHC’s business, financial condition, and results of operations.” 

There is another risk warning in that section that is more specifically tied to dogecoin. Its business, and its shareholders, could be hurt if, it says, “the markets for dogecoin deteriorate or if the price of dogecoin declines.”   

Dogecoin and Robinhood
Dogecoin, once considered a joke, is now a huge percentage of Robinhood’s revenue. Photo credit: Shutterstock.com

Is Robinhood a Bad Investment?

In a related development, Wall Street analytics shop Wolfe Research has initiated its coverage of Robinhood. 

The report says, “we cannot in good faith recommend investors get involved in HOOD on either the long or short side.”  

In a note Thursday, August 20, the author of that report, Steven Chubak, expanded on the report’s caution, with specific reference to the dogecoin issue. “HOOD’s growth within Crypto is nothing short of remarkable,” he wrote, “but the outsized contribution from DOGE simply cannot be ignored.” DOGE volumes are tracking down quarter by quarter, and the 3d quarter loss of volume “could be much more acute than many investors were anticipating.” 

If Robinhood is in effect betting on continued DOGE volume, then this is a bet that it has a good chance of losing. 

Why Such a High Percentage?

It is unlikely that the management of Robinhood is deliberately placing any bet on dogecoin. The 10-Q shows that management is aware of the risks. 

What seems to have happened is that Robinhood has simply gone where the market demand has led it. It went into crypto in a big way because its users wanted crypto, and then into dogecoin because its users wanted that.

There is a lot of competition in the business of facilitating crypto trading though

Robinhood’s CFIO, Jason Warnack, during the earnings call on Wednesday, said:  “There have been several moments of pretty notable volatility in the markets, not just in equities, which is mostly in Q1, but also with crypto, which is in Q2, [and this] makes it incredibly difficult to predict when those moments will continue or happen again.” Robinhood is making a play on the side of volatility, he said. 

In its dogecoin reliance, Robinhood risks becoming a “meme stock,” a stock of fashion exhibiting the wisdom and the folly of crowds, just as dogecoin is quite explicitly a meme coin.  In other words, a castle without a moat.