Robinhood Markets (NASDAQ: HOOD) has sent investors on a rollercoaster ride since going public in 2021. Its stock listed at $38 per share, soared to a record high of $85, and then plunged by 91% to an all-time low of around $7 — all in less than a year.
Shareholders were bullish on Robinhood’s ability to attract young, first-time investors to its trading platform, where they can buy and sell stocks, options, cryptocurrencies, and more. However, since many of those clients make risky short-term bets as opposed to long-term investments, they tend to flock to the platform when markets are rising, only to leave during challenging times (like in 2022).
Trading activity is soaring right now thanks to the raging bull market in everything from stocks to cryptocurrencies. As a result, Robinhood stock is up by a whopping 269% over the past 12 months. However, there are two key reasons investors should be concerned.
Robinhood generates revenue in two ways. First, it earns commissions when clients buy and sell stocks, cryptocurrencies, and other financial assets, which is known as transaction revenue. Second, it earns interest on the cash it holds on behalf of its clients, and also from its margin lending business. This is called net interest revenue.
Since transaction revenue comes from Robinhood’s core business operations, it’s the more important figure to watch. During the fourth quarter of 2024 (ended Dec. 31), it soared by 184% year over year to a record high of $672 million. However, more than half of that came from processing cryptocurrency trades, which contributed $358 million in transaction revenue. That was up by an eye-popping 733% compared to the year-ago period.
Robinhood has been here before. During the second quarter of 2021, its cryptocurrency transaction revenue soared by 4,560% year over year to $233 million. It was driven by euphoric conditions in the crypto markets that weren’t so different from today, with Bitcoin currently near a record high, and popular speculative tokens like XRP and Dogecoin logging big gains over the last 12 months.
Here’s the bad news: One year later, in Q2 2022, Robinhood’s crypto transaction revenue had plunged by 75% to just $58 million. That coincided with the 91% collapse in Robinhood stock.
I think there is a serious risk of a similar decline over the next year. Robinhood’s Q4 2024 result was propelled by President Trump’s U.S. election win in November, because he campaigned on a series of pro-crypto policies which triggered a buying frenzy among investors. However, many popular tokens have already reversed course. XRP is down 22% from its recent high, Dogecoin is down 48%, and Shiba Inu has plummeted by more than 50%, which is likely to dampen investors’ enthusiasm.
