Robinhood promised to make investing and trading easier for consumers with its no-commissions app. But after repeated bouts of bad publicity, a $65 million fine from the SEC, trading glitches at the peak of meme stock rallies, and one young trader committing suicide, the company’s red flags have become too hard to ignore for both customers and shareholders.

Like the Peloton bikes now being sold online at a deep discount, the enthusiasm around Robinhood is clearly fading after the financial technology company reported its latest quarter with shrinking revenues and a wider-than-expected loss.

On Thursday, Robinhood reported first quarter losses of 45 cents per share versus the 36 cents expected and revenues of $299 million, well below the $355.8 million expected. It was a 43% drop in revenues compared to a booming first quarter in 2021. Much of that initial activity was driven by the rise of meme stocks like Gamestop and AMC, interest in cryptocurrencies, as well as consumer trading discussions on Reddit forums like r/WallStreetBets. 

Robinhood’s business model relies on a practice known as payment for order flow for revenues instead of commissions. Instead of charging customers and users for trades, Robinhood generates revenues from the spread for its trades that it transmits to large trading houses. That worked for the company when there was a large volume of buying and selling activity, but fell apart when user behavior shifted. 

As a result, a decline in Robinhood’s monthly active users to 15.9 million, down from 17.7 million from the same quarter last year, also pulled down the company’s average revenue per user. The number fell to $53, down from $137 a year prior and $64 in the previous quarter. 

Revenue from crypto trading dropped to $54 million from $88 million a year ago, and revenue from equity trading plummeted even more — to just $36 million from $133 million, or a slide of 73%.

The downward spiral is evident in other ways. Its market capitalization is now just $8.3 billion, a far cry from the heights of more than $30 billion it touched after the Palo Alto-based company went public last July. Unsurprisingly, Robinhood announced last week it would lay off 9% of its staff.

Information from our parent company, Thinknum Alternative Data, shows that the situation for Robinhood was already looking grim just a few months after the IPO. Starting in November, 2021 hiring began to decline, according to job listings data.

The trading app’s meteoric rise

At its peak in popularity, Robinhood was a major player in transforming retail investing in stocks, ETFs, options, and cryptocurrencies like Bitcoin and Ethereum. The company was founded in 2013 by Stanford grads Vladimir Tenev and Baiju Bhatt, who’d both previously worked on high-frequency trading software for Wall Street. Other free online investing platforms like Acorn, Webull, Stockpile, Invstr and others soon followed. 

Robinhood’s rapid success during the pandemic resulted in the company debuting on the Nasdaq last year, when it began trading under the ticker HOOD. 

Retail trading on platforms like Robinhood grew in popularity during the Covid-19 pandemic, as millions of people quarantining at home picked up investing as a hobby. The rise of meme stocks, as well as consumer trading discussions on Reddit and other online forums, also helped increase activity on these platforms.  

Robinhood gained the most growth of any online broker, helping reach 13 million users and 4.3 million trades on average per day as of August 2021. The company has also raised $5.6 billion over 28 rounds of funding, according to Crunchbase. Investment came from major VC firms and celebrities, and several rounds took place during the pandemic. The last one occurred on February 1, 2021. 

But only a few days before, Robinhood users became upset when they were prevented from trading shares of GameStop and other volatile companies. Many of these users expressed their dissatisfaction in their reviews of the app on the Apple App Store, tanking Robinhood’s rating, according to data from Thinknum.

For most of the last year, the number of ratings for Robinhood’s app has also been flat on a month-over-month basis. 

The move by Robinhood to halt trading happened fewer than 24 hours after the Securities and Exchange Commission (SEC) warned it was “monitoring” the market volatility. Robinhood was accused of misleading customers and failing to satisfy a legal mandate required of brokers to provide the most favorable terms when executing an order, a term known as “duty of best execution." The company settled with the SEC for $65 million.

Contradicting standard investing advice

Normally, I would be a prime candidate for trading and investing on Robinhood.  Along with my income as a business reporter, I have a healthy savings account, several years of retail banking experience, and have been investing in ETFs and mutual funds for more than 15 years. I’ve even completed classes in corporate finance and securities.

But in addition to conflict of interest policies, several things made me stay away from opening a Robinhood account and actively using its app. Among those:

1. The design of Robinhood’s app encourages frequent buying and selling. This contradicts much of the financial advice given to people investing long-term for retirement and research has shown the practice leads to worse returns. 

2. Cryptocurrencies like Bitcoin and Ethereum have quickly risen in value, but they have been extremely volatile and their energy demands have had severe environmental impacts.

3. Robinhood added options trading and margin loans. Options can help amplify gains as well as inflate losses and the likelihood of default. 

4. Active trading requires a lot of time, energy, and tolerating a high level of risk. I can barely tolerate losing $20 or $40 at a casino on vacation.

5. And finally: I've read too many stories of people who lost big, or worse. 

Dangers for inexperienced traders

It’s not hard to find stories of five- and six-figure losses from people who traded on Robinhood.

As recently as two days ago, a Reddit user posted he had lost $51,000 over two years trading on the app, including a $30,000 loan with a 14% annual interest rate. 

Last February, an anonymous trader told Vice he lost $400,000 on a single kind of leverage bet known as a single stock option: The $200 strike price call option on Alibaba. 

And in March 2020, Navy medic Richard Dobatse told the New York Times he lost $860,000 trading on Robinhood, especially due to an outage over nearly two days in March. Dobatse took out $15,000 in credit card advances as well as $60,000 home equity loans for these trading activities.

The most notable case of loss from trading on Robinhood was the suicide of Alex Kearns, a college student from Nebraska. Kearns killed himself on June 12, 2020 after he logged into the company’s app and saw that his balance had dropped to negative $730,165. The figure was so high partly because of some trades that had not been fully accounted for.

“How was a 20 year old with no income able to get assigned almost a million dollars worth of leverage?”, read a note found by Kearns’ parents, later posted on Twitter. “There was no intention to be assigned this much and take this much risk.” 

With Peloton, at least the user’s financial losses were restricted to the company’s exercise equipment and its subscription fees. With Robinhood, the novelty of losses were entire savings accounts, home loans, and actual lives. That was enough for millions of users to drift away, permanently scare away people like me, and convince plenty of investors to sell off.