Robinhood Sucks, but Financial Innovation is Awesome

LONDON, UK – January 2021: Robinhood financial investing app on a mobile device

A company with an app that has confetti dropping to celebrate your trades. A company that makes leverage easily available to maximize your gains (and losses). A company that makes it all easily available on your phone – and you can check the balance 100x per day (note: I don’t use Robinhood but I still do this quite a bit with CoinStats). Also: A company whose mistakes led to a 20 year-old who committed suicide. A company that sells customer data to hedge funds so they can win the zero-sum game of shorting stocks held by retail investors. A company that paused trading on GameStop stock to the benefit of powerful hedge funds and to the detriment of youthful inexperienced investors who had much more to lose. Finally, a company whose CEO and founder purposely avoids questions at congressional hearings because he knows the real answers would uncover the ugly truth. 

 While Robinhood has had some good effects, like forcing competitors to make zero-commission trading widespread and onboarding an entire generation into investing, it’s a menace that acts in manipulative ways for benefit. Robinhood’s filing for IPO document (called an S-1) mentioned the many lawsuits being brought to the company, something you usually don’t see in what’s supposed to be an otherwise hopeful and enticing document for future public shareholders. To no one’s surprise, Robinhood will be offering a two-tier share structure that will give inside shareholders (including CEO Vlad Tenev) 10x the voting power over regular shareholders so that the company can continue its reckless campaign of regulatory overrun. Where there’s smoke there’s usually fire, and Robinhood is facing fines for facilitating money laundering, and impeding the freedom to trade what users want to trade and when for it’s own benefit. The fines paid by Robinhood in many of these legal cases is to the tune of $70 million, $15 million or $10 million, which may sound like a lot, but not so much when your annual revenue is over $1.5 billion.

Robinhood’s interface encourages you to check your balances tens or hundreds of times each day, and encourages day trading. Day trading can make it feel like you’re doing something. Day trading is also very closely associated with gambling. I’ve stated in previous posts that I am a long term holder and investor in crypto because I believe in the technology. Obviously it’s awesome when we get the returns that come with crypto (which has outperformed every other asset class over the last 10 years) but it has been very intrinsically rewarding to me because this technology has the power to do so many good things for the world, and will. Anyway, back to day trading:  the truth is that less than 5% of active traders make money against the market average (think S&P 500 index). I have fallen prey to the same trap. Back in the January-February 2021 stock market hysteria I destroyed most of my speculative day-trading gains with a call option on Shopify stock. I learned my lesson. The truth is that with successful, long-term investing you’ve got to leave out the dopamine hits of short-term gains and options trading. Long-term investing actually isn’t very fun at all while you’re doing it- isn’t it super boring to shuffle money away from each paycheck into an index fund? In crypto, to get the awesome returns, you’ve got to ride it out for years and take the beatings that come with bear markets and dollar cost average. It’s the more fulfilling ‘type 2’ fun where you look back at all of the boring days and small investments that over time have become the basis for your financial stability.

The good news is that if you’ve been able to hold your coins through one or multiple 40%+ corrections, you are a veteran of crypto– and you’re actually part of a minority of individuals who did not FOMO in when the market was going up and panic sold when it was crashing. Many times I find myself asking: if I had owned 100 Bitcoin in 2011 when the price was $1, would I have had the mental discipline to HODL after the 10x, 100x, 1000x, 10000x and 65000x gains that came after that and the subsequent drops? I would probably have sold most of it- and the journey would be an emotional beating, which is why I try and dollar cost average with crypto and forget about it. This past reality is a cue that the future of crypto will probably provide equally trying times. As the great American author Mark Twain once noted: “history doesn’t repeat itself, but it rhymes.”

It wasn’t possible, but if I had bought those coins on Robinhood with their addictive trading interface I could easily see my early-twenties 2011 self panic-selling and FOMO buying and moving the money around to other assets, and not capturing all of those wonderful Bitcoin gains. Robinhood recently disclosed that inside it’s cryptocurrency brokerage 34% of the firm’s revenue came from Dogecoin, a currency with little value add that experienced fantastic gains and losses and has become a major pop culture phenomenon worldwide. Most hardcore HODLers would agree that Dogecoin embodies the speculative nature of crypto, which gives the whole technology/asset class a bad rap. Although I find Coinbase and CoinStats’  UXs addicting, I definitely will not be supporting an app/brokerage that encourages day trading and sells my data to hedge funds.

We’re in an exciting time

It’s pretty awesome that we’re seeing an unprecedented amount of financial innovation- roughly 1 in 5 of the world’s unicorns (new companies valued at over $1 billion) are Fintech firms like Square, PayPal, and Robinhood- but Fintech as a space is only a temporary solution and a way to make a bit more accessible the age-old institutions of traditional banks and brokerages who have close relationships with central banks. [Ironically] Billionaire PayPal Founder Peter Thiel stated that ‘0 to 1’ is true innovation, a true game-changer- like human-powered flight, the discovery of vaccinations, or electricity- and ‘1 to n’ is really just building out and slightly modifying those innovations. Digital payments (i.e. Square, PayPal) are 1 to n- but crypto is truly 0 to 1, because it cuts the umbilical cord between banks and governments with its anonymity and decentralization. It much better accommodates the concept of globalization, will bank the unbanked, and pairs perfectly with the one way arrow of history in the 21st century that points in the direction of dispersion and decentralization.

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