More Allegations Against Binance

What you need to know today in crypto and beyond

July 2, 2021

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Today's must-reads

Top Shelf

NO END IN SIGHT: Regulatory scrutiny of crypto exchange platform Binance continues. Financial watchdogs in Thailand and the Cayman Islands say the crypto exchange is not authorized to operate in their jurisdictions. Likewise, Singapore’s financial regulator and central bank said Wednesday they are watching regulatory developments surrounding Binance.

GO DOGE: Trading app Robinhood filed for a public offering that could be worth up to $100 million, filings with the SEC show. The documents show that 17% of the app’s revenue came from cryptocurrency transactions in the first quarter of 2021, up from 4% in the previous quarter. About a third of those transactions were in dogecoin.

EXPANDING ACCESS: Crypto currency exchange Coinbase has started offering institutional customers access to more trading pairs and payments options through fiat currencies, it said Friday. Up until now clients were only able to purchase crypto in their local currency but they can now make deposits and withdrawals in USD, EUR or GBP.

MORE SUSTAINABLE: The Blockchain Mining Council says the industry’s energy mix is looking greener. Based on a survey conducted by the council, renewable energy accounted for 56% of mining during Q2, making it “one of the most sustainable industries globally,” the council said.

PARTNERSHIP: Canadian cryptocurrency mining company Hive Blockchain Technologies purchased $66 million worth of graphics processing units (GPUs) following the GPU price drop amid China’s crypto mining crackdown. Hive said it joined the Nvidia Partner Network Cloud Service Provider program, which will help Hive to transition to a better infrastructure that brings more resources from the cloud.

–Helene Braun

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EIP 1559: Ethereum's Fee Market Upgrade Explained

CoinDesk Research's newest report dives into the economic impacts and investment implications of Ethereum Improvement Proposal (EIP) 1559. At its core, the code change is designed to make transaction fees on Ethereum less volatile and more predictable.

At the same time, EIP 1559 also poses several risks to Ethereum including risks of miner capitulation or revolt, technological risk in the form of unexpected bugs, and risk of user disappointment.

In this report, CoinDesk Research gives an overview of how EIP 1559 works and its intended impact for investors, miners and users. Download the full report.

What others are writing...

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Putting the news in perspective

The Takeaway

Robinhood, Charlie Munger and the First Memestock IPO

Yo, Dawg, I heard you liked gambling, so we put some gambling in your gambling, so you can gamble while you gamble.

I’m a very old man, so when I heard that Robinhood would offer a portion of its just-announced IPO to users through its app, of course I thought of Xzibit, rapper and host of the weird 2000s-era relic Pimp My Ride. Xzibit used to do fun and crazy stuff like putting a fish tank into an Escalade, and Robinhood is clearly taking inspiration when it puts risk inside of its customers’ risk.

Think about it: When you buy the Robinhood IPO through the Robinhood app, you’re actively increasing the value of that stock twice. Not only are you pushing up demand for the stock, you’re also giving the company more of the trading data and price spreads from which it profits. It’s brilliant, or at least fascinating, like watching a snake eating its own tail is.

The slight downside is you’re entering into a bet whose risks are equally arcane: What keeps Robinhood going is a stack of interdependent longshot bets no less complicated than its own. About half of Robinhood users are first-time investors, yet complex options trading accounted for 38% of revenue, according to Robinhood’s IPO filing. As we reported yesterday, the filing also revealed that Robinhood made 34% of its cryptocurrency-trading revenue, and about 6% of its total revenue, on dogecoin trades.

Those facts have led to at least one tragedy, the suicide of 20-year-old Alex Kearns. Kearns was dabbling with options trading in Robinhood when, thanks to problems with Robinhood’s user interface, he came to believe he was $750,000 in the red. Robinhood recently settled a civil suit with Kearns’ family, as well as paying $70 million – a very big fine! – to FINRA over flaws in its options data and other issues.

You can perhaps understand why legendary investor Charlie Munger this week told CNBC that Robinhood is “beneath contempt” and “a gambling parlor masquerading as a respectable business.”

Because it is structured to profit from trade volume, the app encourages active, perhaps even manic, trading. Its gamification is designed to give the same kind of return-engagement high you get from Likes on social media apps. The bells and whistles are there for a reason.

“It’s not encouraging people to buy a very, very, very low-cost index fund and hold it for 50 years,” chimed in Warren Buffet, Munger’s longtime Berkshire Hathaway partner, in the same interview. “I will guarantee you that you will not walk in there [and] get that advice.”

The insoluble problem for investors in Robinhood itself is not that this is a bad business to be in, because some individual investors really do know what these tools are and want them, and social trading is going to be a big deal, no question. The problem for Robinhood investors isn’t even that training an entire generation of 20-year-olds to think their future hinges on longshot bets could have negative social or financial impacts. (Because who gives a damn about that, amirite?)

No. The biggest risk to investors in Robinhood is that users will lose money in the trades Robinhood is structurally incentivized to promote, and then decide that they should stop doing that.

The timing of the IPO obscures this handily. Robinhood more than tripled revenue during a period when well-off Americans were trapped inside juggling stonks and crypto bought with government relief checks, while the stock market was also going up steadily and the very first high-velocity meme stock trades emerged. If you think that performance is going to be repeated in the near term, I’ve got a bridge to sell you.

Because eventually the stock market will dip or the meme trade will have a few big failures or amateur active traders will just finally accept that they’re losing money and it will never stop. When some or all of those happen, a lot of users, mostly the ones who aren’t susceptible to cheap serotonin highs, will stop using Robinhood. We’ve already got a leading indicator here in Coinbase, which IPO'd directly into the top of the crypto market. When that market slumped, Coinbase stock dropped more than 25% post-IPO.

Again, I don’t think this means Robinhood is a terrible business. Some individuals actually understand options and speculation. To them I say, go forth and secure the bag.

But your kind are few and far between, ronin, and that means Robinhood will be a much smaller business than any current projections suggest.

–David Z. Morris

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