Out-Investing Inflation: Could Inflated Prices Help Robinhood’s Struggling Stock

Like many other tech stocks across the market, Robinhood has felt the pinch of the latest rapid growth in inflation rates across the US. In November, inflation reached a 31-year high across America, with consumer prices climbing by 6.2%. Whilst the financial downturn and rising cost of living has negatively impacted Robinhood shares in the short term, could rising inflation become good news for the online brokerage as more retail investors look to invest their way around the challenging financial climate?

Sadly for Robinhood, public life hasn’t been the easiest ride following the company’s IPO in July 2021. However, Robinhood had long been aware that much of its revenue had been reliant on specific cryptocurrency services during a market rally that spanned late 2020 to early 2021. In particular, the company claimed that a “substantial portion” of its recent revenue growth had been driven solely by meme-based cryptocurrency, Dogecoin.

Whilst the online retail brokerage experienced a brief price rally shortly after debuting, Robinhood’s stock has drifted some 31.86% below its launch price, owing largely to the decline of Dogecoin - which has fallen 71% from its all-time high price of $0.73 on May 8th 2021.

Robinhood monthly active users. (Image: CB Insights)

Despite Robinhood’s dependency on Dogecoin, it’s worth remembering that the investing app has grown into a market leader in the US, and in Q1 of 2021, the app briefly surpassed 20 million monthly active users.

This means that Robinhood can once again position itself as the ideal place for retail investors to take their first steps in buying and selling stock, and the ongoing global inflation hikes may ultimately draw more newcomers to the market as individuals look for new ways to protect their wealth.

How Easy is it to Use Stocks to Protect against Inflation?

Although high inflation rates are extremely challenging for economies around the world, many market commentators believe that it’s possible to invest wisely to bypass the impact of price hikes.

In a 2015 shareholder meeting, Warren Buffett, chairman and CEO of Berkshire Hathaway said that “the best businesses during inflation are the businesses that you buy once and then you don’t have to keep making capital investments subsequently.” Buffett also added that it’s worth avoiding “any business with heavy capital investment.”

Notably, we’ve already seen retail investors emerge in significant numbers during times of great economic difficulty. When the Covid-19 pandemic caused a stock market crash in March 2020, it also sparked a significant rise in the number of individuals taking their first steps in investing.

According to analysis of around 500 investors, the brokerage found that around 15% of retail investors started in 2020. The boom in retail investing sparked by the pandemic was so profound that Charles Schwab termed the new wave of investors ‘Generation Investor.’

So, is investing a good idea during times of inflation. According to Investopedia, historical data during periods of high and low inflation have produced conflicting results when several different factors are taken into account regarding investing. However, most studies conclude that expected inflation can either positively or negatively influence stocks, depending on the investor’s ability to hedge and the respective government’s monetary policy.

The Timely Arrival of Crypto Solutions

Despite a lack of clarity on the success of investing in traditional stocks against inflation, the reason Robinhood may be set to perform well against an uncertain economic backdrop is likely to be down to the company’s accommodation of cryptocurrency investing.

According to Maxim Manturov, head of investment research at Freedom Finance Europe, the role of cryptocurrency assets like Bitcoin as protection from inflation is already taking off.

“Overall, the recent bitcoin rally reflects the broader use of the coin as a hedge against inflation and the availability of enormous liquidity in the markets due to low rates and QE,” Manturov explained. “The idea that bitcoin may provide better protection against inflation than gold appears to be gaining traction as money flows from gold to digital gold.”

The notion of using cryptocurrencies like Bitcoin as a hedge against inflation stems from the decentralized nature of the assets. Without a central power storing or controlling the cryptocurrency, it should, theoretically, perform better against inflation - however, as the recent Evergrande crisis has shown, digital currencies aren’t always effective as a safe haven investment option.

As more investors turn to cryptocurrencies as a way of escaping the impact of inflation, Robinhood has chosen an excellent time to roll out the platform’s dedicated cryptocurrency wallet, which allows users to send, receive and trade crypto all within one app.

Significantly, Robinhood’s cryptocurrency wallet waiting list grew to more than one million customers within a month of its announcement - signifying the potential impact that its eventual full release will hold.

Although Robinhood’s stock has been negatively impacted by rising inflation rates over recent months, we may yet see the platform’s innovative hybrid stock and crypto options inspire more retail investors to strategically store their wealth against the growing cost of living. With the arrival of its own cryptocurrency wallet, we could ultimately find that the recent record-breaking rates of inflation will help drive the recovery of the stock.

Author bio

Dmytro is a tech and finance writer based in London. Founder of Solvid and Pridicto. His work has been published in Nasdaq, Kiplinger, Financial Express, and The Diplomat.