This morning popular portfolio management app Robinhood announced that it would begin to incorporate cryptocurrencies into their offerings. Robinhood is one of the most popular apps to buy and sell stocks because it offers zero commission trading for all users. This has made it the leading app for millennials to use and start managing their portfolios and experimenting in buying and selling stocks.
Robinhood will initially offer only Bitcoin and Etherium when the service launches and will offer 24 hour trade windows for ten currencies. These are the two most mature currencies currently on the market and other currencies will be added in the future when they are deemed mature by the company. Users can make instant transfers for up to $1,000 and Robinhood will automatically find the lowest available price for the transaction. Lastly, the service will launch in 5 states: California, Massachusetts, Missouri, Montana and New Hampshire.
What Does This Mean
As we have all seen in the news recently, Bitcoin has enraptured the world in its volatility and potential to get rich quick. It has also been in the news because of its severe lack of regulation around the currency because it is completely decentralized and has no concrete backing for its value.
Most currencies today derive their value from something. In America it is representative of our GDP and general economy performance, while in China they derive the value of the Yuan by pegging it to the value of several difference currencies around the world. Cryptocurrencies on the other hand do not have anything to derive their value from other than perceived value. (This could be derived from daily trading volumes or articles in the news) Essentially, it performs like an extremely volatile stock, but without any ties to performance.
Bringing cryptocurrencies to Robinhood places the new commodity in an interesting place. Robinhood is an app to invest in equity or ETF’s (groups of stocks sold as part of a package) and this may warp the way people are supposed to view cryptocurrencies. The original intent of cryptocurrencies was to be an alternative to your traditional, centralized currency, such as a dollar or euro. With all of the news surrounding Bitcoin, as well as this new offering, people may cease to view it as a currency and treat it like a commodity.
By treating the currency as a commodity, this will increase the time people hold the currency and could have adverse affects on price. The longer holding times may decrease daily trading volumes and lower the perceived value of the currency. Alternatively, the value could have the inverse reaction and skyrocket because of the new “rarity” of the currency. The point here is that the currency is so volatile that there is no way to effectively predict what it could do.
Furthermore, when you buy cryptocurrencies online on the “exchanges”, you are charged 2% – 4% on the transaction, similar to how a foreign exchange transaction would operate. On Robinhood, they will be traded with zero trading fees, again much like purchasing equity through the app. The company has stated that this is a move to increase their user base and this service will operate on a break even basis. This could lead to huge market disruption for cryptocurrencies as the traditional exchanges may fail to keep up with what will become the new standard for purchasing and investing in cryptocurrency and be forced to lower or even eliminate their transaction fees.
The Road Ahead
By coming to Robinhood, cryptocurrencies are officially becoming a mainstream investing option. Without clear regulation on the new currencies yet, this could be the tipping point for federal governments to start outlining how to treat it. In the long term, this is great for cryptocurrencies as a whole as it is greatly lowering the barrier of entry for people, as well as expanding their potential market by 3 million (number of Robinhood users). Overall, it will be interesting to see how the currencies react to the new market and mainstream focus, as well as how governments will attempt to regulate them.