Coinbase and FTX Fight Over Robinhood

On Coinbase’s Q1 earnings call from last week, there was a brief interaction that made our ears perk up.

You see, although Coinbase takes questions from traditional analysts, they also use a technology, Say Technologies, that allows retail investors to ask the management team questions. Investors are able to then upvote those questions with weighting towards the amount of shares held.

This quarter the most upvoted question was: “Do you see a strategic advantage in acquiring or merging with Robinhood?”

Now the answer wasn’t what made us interested (“We don’t comment on rumors or speculation on any specific M&A transactions”), but rather that the idea has now entered the zeitgeist. As a side note, Robinhood acquired Say Technologies for $140 million last year, so it could just be an overlap of audiences.

Now, Coinbase could acquire Robinhood if it wanted to. Last week, Robinhood was trading at ~$6.4 billion market cap, while Coinbase has ~$7 billion in cash in the bank.

But a move by a competitor may have just put a nail in that coffin.

Last week, Sam Bankman-Fried (SBF), the billionaire founder and CEO of cryptocurrency exchange FTX revealed the purchase of a 7.6% stake in Robinhood worth ~$479 million. The announcement of course sent Robinhood shares up over 30%.

SBF Rugging Coinbase?

Although SBFs 13D filing states that he intends to “hold the Shares as an investment, and does not currently have any intention of taking any action toward changing or influencing the control,” it is worth noting that by filing a 13D as opposed to a 13G, SBF can take an activist position if he chooses.

Now we don’t expect SBF to go all out trying to control Robinhood directly, as the company has a dual-class share structure which gives the founders voting control, but if history is any teacher, we may just see some indirect control.

Taking a Step Back

SBF and FTX have a history of strategic investments and acquisitions.

In December, 2021, Alameda Research (SBFs quant trading shop) led Stocktwits’ $30 million funding round. Less than two months later and Stocktwits announced it would turn into a brokerage with crypto powered by, you guessed it… FTX.

It’s safe to say that when FTX/SBF makes an investment into a retail focused fintech app, it’s not to be passive.

Another example is FTXs acquisition of Blockfolio for $150 million. As Mario Gabriele put in his great writeup of FTX, the company “both added to and diversified its customer base, setting itself up for a more retail-friendly future”.

By purchasing a retail focused app with millions of users, FTX was able to acquire a type of customer that the company didn’t have. And they were able to do it for a great cost ($23 per customer). Mario calculated that FTXs monthly revenue per customer at the time was $337, meaning the company could ROI in mere days.

If we apply the same calculation to Robinhood’s userbase of 22.8 million funded accounts, we get a cost of $324 per customer. Assuming a similar monthly revenue per user as August 2021, of $337, the payback period would be less than two months.

The Power of Brand Recognition

Over the past few years, SBF has made it abundantly clear that his fight against other crypto exchanges is not from a product perspective (he believes they have the best exchange on the market), but from a marketing perspective.

This is why FTX has spent hundreds of millions of dollars on advertising in commercials, buying rights to stadiums, and incentivizing celebrity endorsements. To gain exchange market share, FTX has to directly compete against Coinbase’s deep retail entrenchment.

But if there is one retail trading app that has more mindshare than Coinbase, it’s Robinhood. As SBF pointed out in a tweet-storm last year: “Robinhood barely even needs to advertise; their name conveys their brand and message without the need for any additional color.”

This also may be why SBF hired the former head of crypto at Robinhood, Sina Nader to be COO at FTX (note: Sina is no longer COO).

Brand recognition is a powerful aspect of marketing, and by potentially integrating the companies either directly or indirectly, FTX gains access to tens of millions of customers.

So, What Does SBF Want With Robinhood?

Although we don’t have any inside information, there are a few possibilities as to why SBF may be interested in Robinhood:

1. SBF is just being a good ol’ trader to make money. Although possible, the size of investment does raise some questions.

2. SBF is trolling Coinbase. Perhaps trolling isn’t the right word (we’ll leave that for Elon), it is possible that SBF is making a strategic play in case Coinbase or another company tries to make a move.

3. SBF wants to buy Robinhood. This seems a little farfetched, but we won’t disregard it entirely.

4. SBF wants to integrate Robinhood and FTX somehow. This seems like the most likely answer. That slowly, overtime, SBF will exert influence over Robinhood to integrate with FTX rather than a competitor.

Time will tell.