Robinhood funds earmarked for platform upgrades

Robinhood has closed a $280 million USD Series F funding round that values the consumer investing app at $8.3 billion. This follows a $323 million Series E round from last July that valued the company at $7.6 billion. The round was led by Sequoia Capital, with Ribbit Capital, Unusual Ventures, NEA, and 9Yards Capital as participating investors.

The capital raise follows a successful year for Robinhood, having grown its userbase by 3 million accounts in 2020, according to its blog post. Half of these newly added accounts were first-time investors. The company also recorded, according to Bloomberg, around $60 million in revenue in March this year, three times its February result.

This year has not all been smooth sailing, however. In March, the company made headlines by having three outages in two weeks. For customers, this meant being unable to trade during specific hours due to technical difficulties. The outages also occurred during a time of extremely high volatility due to COVID-19, which lead to the frustration and anger of many users who were unable to close positions and subsequently lost money.

One such outage, which occurred on the 2nd of March, was believed to have resulted from a “leap day bug,” an error caused by software not factoring in an additional day in February. The outage also happened to occur on the day the Dow enjoyed its biggest point gain since 2009.

The Co-CEOs of Robinhood noted that the outages the app suffered were largely due to unprecedented usage and stress on the core infrastructure. The capital raised has been earmarked for upgrades to the platform, such as building out its capabilities and adding measures to prevent future crashes.

Robinhood Crypto allows users to trade Bitcoin, Ethereum, Bitcoin Cash, Bitcoin SV, Ethereum Classic, Litecoin, and Dogecoin 24/7 with no commissions. The platform is currently only available to customers in specific U.S. states. Because crypto assets are held in a Robinhood Crypto account and not a Robinhood Financial account, they need to be backed entirely by cash and cannot serve as collateral for equities positions.

Although Robinhood claims to purchase the actual cryptocurrencies on their user’s behalf instead of a derivative that tracks a cryptocurrencies price movement, the platform does not allow users to withdraw or deposit coins from their Robinhood Crypto account. The company states that this is to prevent proceeds from illegal activity from being used for transactions. Withdrawals of cryptocurrencies are currently being evaluated, however. These restrictions mean that Robinhood Crypto is only suitable for customers wishing to speculate on price movements, and not for those wishing to control their cryptocurrencies.

Robinhood Crypto is not a member of the Financial Industry Regulatory Authority, and as such they are absolved from responsibilities and obligations that they would typically be subject to when providing trading services for equities. User funds are also not covered by the Securities Investor Protection Corporation, which protects stock purchases on Robinhood to the tune of $500,000.

The company does have a crime insurance policy, underwritten by Lloyd’s of London, that covers a portion of the assets held by Robinhood crypto against losses from theft, including cybersecurity breaches. Cryptocurrencies are stored mostly in cold (offline) storage, with a portion in hot (online) storage to support day-to-day operations.

Having your cryptocurrency controlled by Robinhood (or any centralized exchange) has its appeals, but there are also compelling reasons as to why this is not best practice.

The arguments for using a centralized service, such as Robinhood crypto, for buying, selling and storing cryptocurrency revolve mainly around ease of use. For the non-technical investor or speculator, having the storage of your cryptocurrency managed by a third party may make the act of trading cryptocurrency much less daunting, and thus lower the barriers to entry. This removes the need to learn how to send, receive, and store cryptocurrency entirely. It can also be the safer option for less technical investors, as cryptocurrency that is stored in an insecure manner stands a risk of being misplaced or hacked. Platforms such as Robinhood Crypto also focus heavily on creating a seamless user experience, which adds to the appeal of keeping all your assets in one place.

However, by storing cryptocurrency on an exchange, a user relinquishes a level of control over the funds. It also means that their funds are stored with the rest of the funds on the exchange. This creates a ‘honeypot’ of sorts and becomes an appealing target for hackers that wish to steal the funds.

Hackers stole 119,756 bitcoins from Bitfinex in 2016 which accounted for about 0.75% of all bitcoins in circulation. This was the second attack on the Bitfinex exchange in less than two years – the last hack occurred in May 2015 and involved the loss of a more modest 1,500 coins.

The Hong Kong-based exchange said that losses from the theft would be shared, or “generalised”, across the company’s clients and assets, widening the group of those affected. “This is the closest approximation to what would happen in a liquidation context,” Bitfinex said on its website at the time. “Upon logging into the platform, customers will see that they have experienced a generalised loss percentage of 36.067%.”

The company gave all affected clients a “BFX” token, crediting them for their losses. The token could be redeemed by the exchange or for shares in iFinex, the exchange’s parent company. The tokens were all redeemed by April 2017.