Robinhood Bounces Back Unaffected By Its Savior's Setbacks

Robinhood CEO Vlad Tenev reassured its investors that the company has minimal exposure to the downfall of FTX, a popular cryptocurrency exchange.

"It’s business as usual at @RobinhoodApp," he tweeted on Nov. 10.

Shareholders appeared to agree with Tenev's sentiment as shares jumped by 8.2% pre-market to trade at $9.09 and rose by over 6% after the market opened.

Shares of the brokerage were trading at $11.72 on Nov. 8 when FTX first disclosed it would be acquired by Binance due to its liquidity issues, but closed at $9.80. The stock had fallen by as much as 15% throughout the day.

Investors began selling off their holdings on Nov. 10 as Binance reversed course and said it would no longer acquire FTX due to initial discoveries made as the company conducted due diligence. Robinhood shares fell to $8.44.

Sam Bankman-Fried, the founder of FTX, bought a 7.6% stake in May in Robinhood, a brokerage meant to attract millennial investors who sought to invest in cryptocurrencies.

"Despite SBF having an equity stake in Robinhood, we have no direct exposure to Alameda, FTX, or any of its entities, and we've confirmed with our partners that they don't have material exposure either," Tenev tweeted.

But Bankman-Fried, a former billionaire, faced even larger hurdles that investors were not aware of.

Press reports on Nov. 10 said that Binance discovered a financial black hole, which means a gap between the liabilities and the assets of FTX of over $6 billion, which scuttled the deal.

Venture capital firms made large investments into FTX in 2021 with Sequoia providing capital in a $420 million  round that that boosted the exchange's valuation to $25 billion in October 2021. A consortium with Paradigm invested $400 million in January 2022, bringing the valuation to a massive $32 billion.

The first investor that funded FTX was Binance, the largest global crypto exchange, but the relationship between the two companies crumbled as FTX gained popularity and fans.

Crypto Trading Volume Rises

Investors are still confident in the future of the valuation of cryptocurrencies as the number of buyers have risen to the highest level in Robinhood's history during the past couple of days, Tenev said.

"In the past few days, we've been seeing elevated trading volumes and elevated crypto inflows," he tweeted. "In particular, the last couple of days have been our two biggest days of crypto inflows ever."

In this "flight to safety", we're proud that customers are turning to Robinhood," he added.

Investors have faced extreme volatility in Robinhood as shares fell by 28% during the past five days and plummeted to $7.05 on June 15 as the crypto market ran into severe liquidity issues. 

The massive decline in market capitalization of over $9 billion compared to January meant the valuation of the company was lowered in June to $5.9 billion, making Robinhood an ideal target for a takeover. 

Tenev seeks to maintain confidence in the future of the stock and crypto trading app.

"The stated goal of Robinhood Crypto is to build the most trusted, lowest cost, and easiest to use on-ramp to crypto," he tweeted.

Robinhood Does Not Lend Crypto

Unlike other brokerages, Robinhood does not lend out crypto to other investors or use it as leverage.

"Simplicity is key here — we don't lend your crypto or leverage against it," he said. "We are also extremely selective about the assets we offer, and we intend to keep it that way."

Tenev said the unregulated aspects of trading cryptocurrencies are problematic. FTX is headquartered in the Bahamas and was founded in 2019. 

"Over the past few years, as cryptocurrency has entered the mainstream, we've seen an explosion of new companies and new technologies, many of them offshore and unregulated," he said.

The explosion in the types of crypto investments such as digital coins and various brokerages during the past few years means that investors need to be wary of where they choose to make their investments. 

"In fact, one of the things that has made crypto special is the fact that anyone with a laptop can contribute and create a meaningful new product," Tenev said. "However, this makes it doubly important for customers to do their due diligence into the platforms and products they use."

Robinhood is headquartered in Menlo Park, California.

"As a regulated US entity, we'll continue to do our part, working closely with regulators, to deliver the safest and most trusted crypto experience possible," he said.