Wall Street expects a slowdown in Robinhood's crypto business in the third quarter

Published Tue, Oct 26 202110:48 AM EDT

Robinhood's crypto business has become increasingly important to the trading app's top line, and many on Wall Street are calling for a drop off from the record trading levels in the second quarter. However, with bitcoin recently notching records and Robinhood's new digital-currency wallet feature, the trading app might be able to sustain a robust crypto business and drive revenues higher in the current quarter. The millennial-favored stock-trading app reports third-quarter results on Tuesday afternoon and all eyes will be on its cryptocurrency-based trading revenue. More than half of Robinhood's transaction-based revenue last quarter came from cryptocurrency trading. That jumped from just 3% a year earlier. "I think a slower quarter is pretty well baked in and understood at this point. You saw a pretty dramatic slowdown in crypto trading volumes in the third quarter from the second quarter," said Devin Ryan, JMP Securities analyst. "We do think that will translate in Robinhood's results. We're expecting a slower trading quarter." Robinhood — which has more than 22 million funded accounts — warned investors that trading activity was slowing in the third quarter , but bitcoin hit an all-time high above $66,900 last week as investors poured more money into the digital asset. Some investors attribute the virtual currency's record high to launch of the ProShares Bitcoin Strategy ETF , which tracks bitcoin futures contracts pegged to the future price of the crypto. Other firms believe bitcoin's price is rising because investors see it as a better hedge for inflation than gold . Regardless, Robinhood CEO Vlad Tenev told CNBC last week that "crypto is certainly here to stay as an asset class." "We're very proud of our cryptocurrency platform and giving people more utility with the coins they have," Tenev said, adding that the waitlist for Robinhood 's recently announced crypto wallet now has more than one million customers. Last month, Robinhood announced it was testing a crypto wallet feature . The wallet will allow investors to trade, send and receive digital currencies, as well as move them in and out of the Robinhood app. Robinhood currently offers seven digital coins, including bitcoin, ethereum and litecoin. The new wallets will let clients consolidate their digital coins into one account. Clients can then trade, send and receive cryptocurrencies to and from other wallet addresses. Rivals Coinbase and Gemini already offer this feature. "Robinhood has significantly increased the resources it's dedicating to its crypto platform, and I think that is a testament to how it thinks about the future," said Ryan. "That future is going to include far more than just offering access to buying and selling individual crypto assets." Dogecoin slowdown While bitcoin might be on fire, dogecoin was among the digital coins that propped up second-quarter trading revenue. The meme-inspired cryptocurrency made up roughly 25% of trading revenues in the second quarter. JPMorgan reiterated its underweight rating on shares of Robinhood on Friday, saying it's concerned that cryptocurrency volumes are slowing compared to prior quarters, especially in dogecoin. "We are lowering estimates for Robinhood. While 3Q21 volumes remain robust, they slowed materially from 2Q21 levels. In contrast to cryptocurrency peers, however, we aren't seeing the rebound in October," JPMorgan analyst Kenneth Worthington told clients. Of crypto-based trading, dogecoin accounted for 62% of trading in the second quarter. "Cryptocurrency industry trading volume declined ~40% in 3Q, but trading in dogecoin declined a far more substantial ~75%. It suggests that crypto-trading at Robinhood could decline far more than at crypto-peers. We now estimate it will be down 50% sequentially," added Worthington. Several analysts told CNBC that they are also worried about insider selling this quarter as lock-ups come off. Wall Street is also wondering if Robinhood will cut back on spending this quarter if revenues come in lighter. For the third quarter, analysts are expecting a loss of $1.37 per share on revenue of $431.5 million, according to Refinitiv. Shares of Robinhood are hovering around $39 per share, roughly a dollar above its IPO price from the July market debut.

Baiju Bhatt and Vlad Tenev attend Robinhood Markets IPO Listing Day on July 29, 2021 in New York City.

Cindy Ord | Getty Images

Robinhood's crypto business has become increasingly important to the trading app's top line, and many on Wall Street are calling for a drop off from the record trading levels in the second quarter.

However, with bitcoin recently notching records and Robinhood's new digital-currency wallet feature, the trading app might be able to sustain a robust crypto business and drive revenues higher in the current quarter.