The Impact of Declining Consumer Trading on Fintech Startups

A key question arises concerning rapidly growing fintech companies that have thrived due to increased consumer participation in financial markets: what occurs if individual investors begin to lose their appetite for trading?

This is a challenge currently confronting platforms like Robinhood and Coinbase, both of which have experienced substantial growth. Robinhood has benefited from significant revenue generated through payment for order flow, while Coinbase has seen its trading fees become exceptionally profitable, as evidenced by its initial public offering documentation.

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Recent reports suggest a potential slowdown in consumer trading activity. Bloomberg has highlighted decreasing options trading volume, a decline in Robinhood’s app store ranking, and waning interest in certain alternative investments.

Further analysis from Bloomberg indicates that numerous SPAC shares are trading below their initial offering price, and Google Trends data reveals a diminishing level of consumer interest in trading, potentially restricting the acquisition of new users for equity-focused applications.

Signs of a Cooling Speculative Market

Additional indicators point towards a moderation of the previously overheated speculative market. Bitcoin has experienced a roughly 10% decrease in value over the past week, following a period of substantial growth in preceding quarters.

Stocks that were once highly favored by traders, such as Peloton, have also seen significant declines, with a drop of over 10% in a single day.

Beyond price fluctuations, a reduction in volume at prominent exchanges may also be occurring.

Historical Precedents and Future Considerations

Historical data provides a relevant comparison. Coinbase’s revenue, for instance, has historically fluctuated in correlation with consumer interest in cryptocurrencies. The company prospered during periods of high demand and trading activity, but experienced revenue declines when enthusiasm waned.

Robinhood and similar commission-free trading apps haven't yet faced a comparable cycle of dramatic peaks and troughs in trading volume, unlike Coinbase’s experience following the 2017-2018 bitcoin surge.

The central question now is: how would Robinhood and its competitors fare if the current cooling trend in consumer trading demand persists? This is a topic worthy of further discussion.

Coinbase and Robinhood: Examining Revenue Trends

During the significant bitcoin surge of 2017-2018, Coinbase experienced a period of substantial profitability.

Analysis of the company’s S-1 filing reveals a notable decrease in monthly transacting users (MTUs) during 2018. Specifically, the number fell from 2.7 million to 800,000, representing a decline exceeding 70%.

Further supporting this trend, data from the same SEC filing demonstrates a corresponding reduction in trading volume during the same timeframe. This wasn't simply an inference based on user numbers; the data confirms the decline.

Trading volume decreased sharply from $56 billion in Q1 2018 to $7 billion in Q1 2019.

It’s important to note that this isn’t intended as criticism of Coinbase. The company operates within a trading sector tied to an asset class that has seen considerable value appreciation recently. This presents a favorable business environment.

The Role of Market Dynamics

Coinbase’s success is largely influenced by broader market trends rather than directly controlling the overall fortunes of bitcoin. This observation leads us to consider the situation at Robinhood.

Justina Lee of Bloomberg highlighted relevant data in a Twitter discussion related to her recent article.

Such a trend is unfavorable for a company preparing for an initial public offering. However, it remains uncertain whether any recent slowdown in trading activity will significantly impact Robinhood’s financial results until Q2 2021, assuming the cooling trend persists.

Analysis of Bitcoinity data reveals a decline in weekly bitcoin trading volume on Coinbase. Volume decreased from approximately 351,000 bitcoin in the week ending January 10, 2021, to just over 150,000 in the week ending March 24, 2021.

Speculation and Market Reset

It’s crucial to remember that market conditions can change rapidly. Trading volume could easily rebound.

However, a broader market reset appears plausible. Software company valuations cannot expand indefinitely. The rapid increase in bitcoin’s price, from $50,000 to $100,000, was unlikely to be sustained. The popularity of companies like Peloton is waning as the pandemic subsides and vaccination rates increase.

Consumers may also shift their financial focus away from trading activities.

Even anecdotal evidence suggests a decrease in speculative activity. Friends are discussing options trades less frequently, mirroring the data and potentially reflecting a wider trend.

Looking Ahead for Trading Platforms

What does the future hold for Coinbase and Robinhood? Both companies experienced strong starts to the year. The key question is how their revenues will perform in subsequent quarters if consumer trading slows down.

Fortunately, both companies have revenue streams beyond trading. However, for Coinbase, trading fees represent the vast majority of its income.

According to Coinbase’s S-1 filing, transaction revenue accounted for over 96% of its net revenue in 2020. This indicates a strong dependence on trading activity.

If Robinhood exhibits a similar reliance on trading fees, both companies could face sequential-quarter revenue declines.

This is a critical consideration as Coinbase prepares for its direct listing and Robinhood approaches the public markets.

The coming months promise to be interesting. Further developments will be closely watched.