Mods, this is a post about if us stock traders using robinhood for stocks/etfs should be worried. I know I use the word “crypto” like 100 times but I swear this post isn't about crypto it's about stocks. I don't even own crypto haha. This is a post about whether we should be worried about keeping stock/etf assets on robinhood right now!
TL;DR – If robinhood has been doing anything off-books in their crypto arm, and that arm blows up… it might take the whole company down. Even with insurance should regular investors (stocks/etfs) on robinhood be concerned?
I'll get to my question in a second!
Let me start by saying that I know Robinhood as a broker and Robinhood's crypto arm are separate. I also know that the cash and stocks on Robinhood's broker arm are insured and regulated.
I also use E*TRADE and Schwab for a majority of my trading/investing but recently opened a robinhood account to take advantage of some of their overly-relaxed policies on option spreads.
Also it's worth noting that I choose not to invest anything into crypto, like at all. I'm not a hater, just my preference.
On to my question and thoughts (which I would love to hear if this sub has any good insight on this)
So I've been considering the probability of Robinhood as a whole going bankrupt if their crypto arm blew up. What do you think would happen if their crypto arm blew up for normal stock/etf/option investors? What do you think the chances of their crypto arm blowing up is? and of course if their cyrpto arm did take the whole company down, people using robinhood to invest traditionally would be insured… but at what cost? Waiting years to get a check from the government and lock their capital up?
Considerations about their ethos as a company
On Robinhood, someone can start a new account, initiate a deposit of $100, and before that deposit is even landed apply for level 3 options trading and get approved. They basically would give literally anyone the ability to trade credit spreads on whatever they want. Although credit spreads are “defined risk”, there are certainly cases where someone can get assigned 10's of thousands if not 100's of thousands of dollars worth of shares. Like what does that tell you about the culture of this company?
If they're saying “yeah sure dude it's totally chill if you gamble with money you don't have, it's fine bro”… then what does that tell you about their culture regarding their own risk management?
Now it's easy to look at a billionaire CEO and say “why would they commit fraud and risk losing what they've worked so hard to build”, but every couple months a new story breaks about a billionaire CEO cooking the books, gambling with company money, and stealing from the company.
I know a lot of those stories are about CEOs in the crypto space, but that's exactly what I'm getting at. If Robinhood has shown they're a company that approves of gambling, then there's reason to consider that in their crypto arm there could be some sketchy stuff happening. I'm not saying there is, and there's no evidence I know of of this, but it's worth noting that their ethos is that of people cool with gambling.
My second consideration and concern is that they don't even make money like a regular exchange to begin with on stocks, etf's, and options. They are commission free and have their own model selling order flow data or whatever it is they do. I'm not doing a dive into that here because I'm not criticizing their business model, just saying that their cash flow is different from that of an ordinary brokerage. They earn money differently, so to compare their financial stability to a regular brokerage isn't valid. This company makes money (and stays solvent) using a unique business model. . I'm bringing this up to highlight that their company is already set up in a way that's less easy to understand and evaluate.
If robinhood's crypto arm gets blown up, it might affect the whole company
Now let's say somehow robinhood's crypto arm blows up from some kind of chain reaction in the space. Maybe they had their own side hustle going on off the books doing some speculative crypto stuff. One might think… “well the crypto arm is a separate entity, it wont affect the main brokerage side”….
But that's how every single company that blows up was structured. There's no way that liquidity doesn't move between the two arms. There's never a situation where one arm blows up and the rest are just “fine”. There's almost certainly money and value being moved constantly between the two. Imagine a situation where you want to make one company seem more valuable on paper. It wouldn't be a stretch to imagine counting assets from one towards the other and vice versa since in a corrupt CEO's eyes they'd basically be “the same company” so what's the big deal. (I'm not saying CEO is corrupt, I'm saying it's not uncommon in FinTech space to cook books).
I would imagine that if Robinhood's crypto arm blew up, the entire company would likely go bankrupt and stock traders using their brokerage for investing/trading would likely see their assets frozen until they get a check in the distant future (because again the stocks/cash is insured).
Now with that being said, I'm bringing all these thoughts here because a lot of you are more educated than me. I want to know if people using robinhood to invest in stocks, etfs, and options should be concerned about the fact that robinhood as a whole has big skin in the crypto game.
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