Robinhood (HOOD) is trying to restart its growth by adding the Lightning Network to its platform.
Lightning is a layer-2 network or sidechain built into Bitcoin (BTC). The purpose of the Lightning Network is to speed up Bitcoin transactions by creating a shortcut around Bitcoin’s encryption.
To explain all the encryption on Bitcoin, makes the cryptocurrency slow and clunky. For instance, the standard Bitcoin processing speed is five transactions per second (TPS).
Hence, a trading solution such as Robinhood can only process five Bitcoin transactions at once. That makes it impossible for Robinhood to process enough Bitcoin trades to make money.
Why Robinhood is adding the Lightning Network
The Lightning Network solves this problem by adding a smart contract to Bitcoin (BTC). The Lightning smart contracts process transactions outside the blockchain.
That enables lighting to process a transaction in milliseconds. This enables instant micropayments or Atomic Swaps Lightning’s developers at Lightning Labs Claim their network is capable of processing millions of transactions at once.
Additionally, they claim the Lightning Network can lower fees by charging low fees. Theoretically, Lightning could enable Robinhood (NASDAQ: HOOD) to process hundreds of millions of dollars worth of Bitcoin.
Why Robinhood Needs Bitcoin
I think Robinhood (HOOD) is adding Bitcoin (BTC) because the company loses money. For example Robinhood reported a -$1.344 billion quarterly operating loss on 30 September 2021 and a -$420.44 million quarterly operating loss on 31 December 2021. In contrast Robinhood reported a $333.22 million quarterly gross profit on 31 December 2021.
I suspect Robinhood’s management hopes they can make money from Bitcoin transactions to end the losses. Bitcoin is the most popular cryptocurrency, CoinMarketCap gave Bitcoin a Market Cap of $761.696 billion, a Fully Diluted Market Cap of $841.475 billion, and a 24-Hour Market Volume of $327.63 billion on 11 April 2022.
Hence, Robinhood’s management thinks they can enter a $841.475 billion market through the Lightning Network. The hope is to make Robinhood into a popular cryptocurrency trading app and expand outside the United States.
Robinhood is already a major player in crypto. Almost 10 million Robinhood users traded cryptocurrencies in 2021, CoinDesk estimates. Additionally, Robinhood generated $48 million in crypto revenues in fourth quarter 2021.
To grow its crypto market, Robinhood will offer a new digital wallet to two million users, Coin Telegraph claims. The Wallet will use Lightning Network to trade Bitcoin (BTC) through Robinhood’s platform.
How Much Money is Robinhood losing?
Robinhood (HOOD) burns cash. For example, Robinhood quarterly operating cash flows of -$275.63 million on 31 December 2021 and -$1.008 billion on 30 September 2021.
Conversely, Robinhood reported a quarterly operating cash flow of $2.281 billion on 30 June 2021. Impressively, Robinhood reported quarterly ending cash flows of $7.854 billion on 31 March 2021 and $2.266 billion on 30 June 2021. The quarterly ending cash flow fell to $340.11 million on 31 December 2021.
Predictably, Robinhood borrows enormous amounts of money. Robinhood reported quarterly financing cash flows of $3.558 billion on 31 March 2021 and $1.651 billion on 30 September 2021.
Consequently, Robinhood reported $5.637 billion in total debts on 31 December 2021. The total debts fell from 7.92 billion on 30 June 2021 and rose from $3.284 billion on 30 September 2021.
What Value Does Robinhood have?
Robinhood (NASDAQ: HOOD) offers growing value. For instance, Robinhood reported $8.139 billion in cash and short-term investments on 31 December 2021. The cash and short-term investments grew from $1.403 billion on 31 December 2020.
Similarly, Robinhood’s total assets grew from $10.988 billion on 31 December 2020 to $19.769 billion on 31 December 2021. Conversely, Robinhood’s quarterly revenues grew from $317.54 million on 31 December 2020 to $368.61 million on 31 December 2021. Interestingly, Stockrow estimates Robinhood’s revenues grew by 16.08% in the quarter ending on 31 December 2021 and 309.39% in the quarter ending on 31 March 2021.
Hence, Robhinhood is a fast growing company that loses money. Robinhood is also a company that needs to prove itself to Mr. Market. For instance, Robinhood’s share price fell from $34.82 at its initial public offering (IPO) on 29 July 2021 to $11.35 on 8 April 2022.
I suspect Robinhood’s management hopes to reverse the share price collapse by adding Bitcoin (BTC) trading. The hope is to cash in on Bitcoin’s growing popularity, particularly in high inflation countries such as Argentina and nations such as United States where faith in traditional markets and fiat currencies is collapsing.
Investors need to watch Robinhood closely to see if the Lightning Network can save the company money. However, I advise investors to stay far away from Robinhood because it is obvious that the popular trading app cannot make money. Yet Robinhood stock is so cheap you recommend you watch closely.