Where do the retail investing platforms go from here?
A deeper look into Robinhood and Coinbase and what they might need to do
Coinbase and Robinhood both made a name for themselves by making investing accessible to the masses. Other options like E-Trade and Fidelity were available, but never took the UX leap that appealed to milennials and Gen Z. Coinbase and Robhinhood “democratized investing”, making it literally as simple as connecting a bank account to buy assets. Retail investors flocked. Stimulus checks, free-time, and FOMO on a surging capital market led to billions of dollars flooding into accounts on both platforms.
Both make money from transaction fees primarily, Robinhood from utilizing market makers and Coinbase from taking a fee per trade in a tiered system ($0.99 for less than $10 transaction, $1.49 for <$25. Each also has a paid subscription service and generates cash elsewhere. Transactions can be great revenue drivers, as you can see with the immense late funding rounds of both - Robinhood with a $1B series H and Coinbase with a $300M series E. Higher perceived upcoming cash flows lead to higher valuations, which is generally how valuations work.
The only problem is that the target audience for both of these investing giants has (for the most part) never seen a downturn before. People who yolo’d their savings into high flying SaaS stocks, Dogecoin, etc. are currently down bad. Really bad. And if you’re under the age of 35, myself included, navigating downturns is unfamiliar. Not only that, but it’s scary, and pulls investors out of the market. Getting rich quick is fun. Getting rich slowly is less fun.
This chart from Robinhood’s Q1 earnings presentation is scary, and syncs perfectly with their share price from the screenshot up top. Coinbase’s probably looks similar. Given what I discussed above, it’s pretty easy to extrapolate that with fewer users comes less revenue and less appetite in holding onto their shares. Markets are of course cyclical, so the numbers will rebound eventually. But businesses aren’t meant to sustain losses for lengthy amounts of time - they have boards, shareholders, and employees to deal with.
So where do we go from here? How do two companies that rely on good market conditions survive when market conditions… aren’t that good?
Before I start, I want to say that overall Robinhood and Coinbase made life a lot better for most people and technology. Starting with the latter because in my opinion it’s had a bigger impact, Coinbase has become the largest on-ramp to web3 and crypto for beginners. That’s absolutely critical for the success of the ecosystem and they’ve done a pretty damn good job of it. I expect that to continue. Robinhood has also made financial education and investing something that people as young as their early teens are interested in. That’s something the incumbents couldn’t do, and savings/investing younger is without a doubt a net positive on society. Obviously there will be downswings and too many YOLO plays, so people will lose money too, but net net a win.
In Robinhood’s case, the most logical next step to me would be to offer a more robust research center and social platform in order to retain investors and capture more from a recurring subscription. With so many people being spooked, a lot of them will inevitably realize that due diligence is important. Why should they have to leave Robinhood for that? Robinhood was built buy engineers for people, maybe it’s time to hire more finance professionals to do their own proprietary research and provide that to paying subscribers. It’s done a good job sourcing data elsewhere about companies, owning that data could be more valuable to retail investors.
Robinhood could leverage that owned data and subscription plans to add a more social element to its offering as well. In that case, investors wouldn’t have to go to Reddit, Stocktwits, or rival Commonstock. Instead, retail investors could do all their chatting, reading, and trolling where they already are. This keeps investors on the platform and continuing to interact and spend.
Coinbase is a bit trickier. Crypto is already considered to be a scam by many, so downloads and use will inevitably slow until the perceived crypto winter is over. One way that Coinbase could incentivize people to stay active and to trade is to offer a yield on cash in their account and simple staking for beginners. This way, users might be incentivized to regularly add funds and make use of their either via cash or crypto. Alternatively, Coinbase could lean heavily into making crypto part of our everyday lives. Setting up an integration with Square so you can pay for your coffee with eth, maybe an add on for e-comm sites to do the same. Any way to continue to get crypto in front of normal people while also displaying that there are advantages beyond trading for “light” users will help. While neither of those might be huge revenue streams, Coinbase doesn’t need that yet. Right now their funnel is wilting, and awareness becomes key. With new on-ramps they can get more account downloads and more people exploring.