“The price jump doesn’t prove any wrong doing”, I said. A friend and I were discussing the Bitcoin Cash debut on Coinbase. Majority opinion said that there was insider trading. Prices had nearly doubled within 2 minutes of trading. The market opened at 4:00pm PST. So, while end-of-day low liquidity was a plausible explanation everyone went for “insider trading”. They eventually opened trading 17 hours later, at 9:00am PST with much fanfare.This whole episode showed issues in running a cryptocurrency exchange. Coinbase has been arguably the most famous cryptocurrency exchange for past 6 years.
Last week, Robinhood, an app-only zero fees brokerage started its operations. People signed up for the beta in droves and reams written about how this a game changer. But as always there are some doubts. In this article we attempt to look at some of the important unanswered questions.
What is Robinhood?
Robinhood is a broker. When you buy/sell a stock, they will execute the order, on your behalf, on an exchange — NYSE, AMEX etc.
With the introduction of the cryptocurrency arm, they want to replicate a similar model. They will take your order and execute on different cryptocurrency exchanges. It is still not clear on which exchanges will be covered by Robinhood.
Will they have better prices?
Here’s a quote from their PR release on endgadget:
Cryptocurrency prices are notoriously volatile. To counter that, Robinhood Crypto gives users an estimated price, and once users confirm a buy or sell order, they scan a gamut of trading venues, exchanges and market centers to find the lowest offer, TechCrunch explained. To account for wild price fluctuations, the service puts a ‘collar’ around your order; If it can’t find a price within this margin, it will wait until one surfaces to execute your order or inform you.
As they noted here, cryptocurrencies pricing is difficult. Coinbase solves this problem by having their own exchange — GDAX. It helps them set better prices. Robinhood doesn’t have this advantage. So, they came up with a cleverly named strategy — “collars”. What are these collars? Their support page offers some insight (with link added to explain market orders):
market orders are adjusted to limit orders collared up to 1% for buys, and 5% for sells. Collars are based off the last trade price. This means that your order will not execute if the price of the cryptocurrency moves more than 5% lower than its price at the time you placed a market sell order, or more than 1% higher than its price when you placed a market buy order, until it comes back within the collar.
And,
Any price difference you may see between the estimated price and the execution price is due to market movement and is not something that Robinhood profits from.
This means is if say bitcoin is trading at $10000 and you:
a. Sell on Robinhood — price received by you can be as low as $9500
b. Buy on Robinhood — price received by you can be as high as $10100
Cryptocurrency exchanges are not exactly known for their best execution and connectivity, I predict the buying/selling prices on Robinhood to be even worse than real market prices.
Zero-commission
Major selling point for Robinhood is the zero-commission model. This will prove beneficial for anyone using limit orders in their cryptocurrency trading. I dare say it might be even the best platform for cryptocurrency, provided trade execution between Robinhood and cryptocurrency exchange is good.
But, majority of Robinhood’s users are unsophisticated investors. They will be using market orders a lot. And the weird way of handling market orders, by wrapping it around a limit order, people will end up paying 1–5% more. If there is price slippage on exchanges the whole zero-commission might prove useless.
Forks
Coinbase got a lot of heat for the BCH fork. And given that Bitcoin May Split 50 Times in 2018 surprisingly Robinhood doesn’t have a fork policy.
KYC and Customer Support
Coinbase has 12 million customers. One of the biggest challenges for Coinbase has been fake accounts. They have been adding newer and harsher KYC norms. These norms have received backlash from the cryptocurrency community. There has also frequently reports of their ID verification facing issues.
Coinbase’s support has not fared well either. There have been complaints of tickets being unanswered for months.
Robinhood has nearly 3 million customers or 25% of Coinbase’s size. Even the early access counter has stopped counting after 1 million signups. So, it will be interesting to see if they are ready tackle droves of cryptocurrency users. Or is it going to end in disappointment.
In conclusion, it seems their weird way of handling market orders has a potential to offset their zero-commission brokerage offering.
If you are interested in learning about cryptocurrencies, Check out my blog at: https://blockchaintechblog.com/