Why Robinhood Could Fuel the Next Gold and Crypto Rally

Much has been written about the trading platform Robinhood and its users, with some even calling this sharemarket rally the Robinhood Rally.  The free trading app has exploded in use from 1 million in 2016 to over 13 million and at an average age of 31 they are predominately millennials.  The app is deliberately designed with a ‘gamer’ feel to it and feeds on FOMO with a leaders list (ironically ranked by popularity) and the like prompting young users to check in throughout the day more than their Facebook or Instagram account.  There are also social media ‘influencers’ pumping shares and investment ‘strategies’.  Throw in lockdown boredom, ‘free’ dole payments from governments everywhere and the “Don’t Fight the Fed” backstop narrative and it’s a recipe for trading hysteria.

Two examples highlight the level of stupidity with firstly the already officially bankrupt Herz shares being traded from 56c/share to $5.53.  That’s a 900% gain in 2 weeks between 26 May and 8 June for a company that had already filed for bankruptcy and carried $17 billion of debt accounting for 90% of its total capital and next to no income during the lockdown to service it.  Prior to Herz going bankrupt there were 43,000 Robinhood accounts invested in the company.  At the peak of that buy up in mid June that had exploded to 171,000 accounts…. after bankruptcy!

One of the aforementioned social media influencers is Dave Portnoy who famously picked shares from random Scrabble tiles to prove he could outperform the big hedge funds because ‘everything goes up’.

The Robinhood phenomenon speaks to a number of things.  Firstly, as the name suggests, it allows those who previously felt that only the rich could profit from the Fed inflated markets to participate.  That speaks firstly to the effects of the social dislocation of current central bank policy which has enriched the rich and left the other 90% behind.  From CNBC:

“We’ve seen a major paradigm shift for broader financial services,” Robinhood co-CEO Baiju Bhatt told CNBC in a phone interview. “People that previously didn’t feel like the markets were for them are for the first time feeling a sense of inclusivity.”

It may also speak to the usual but unfortunate phenomenon of the rotation of institutional or ‘smart money’ to the hapless ‘mums and dads’ at the peak of each market, though now it’s their kids…

The self-reinforcing herd mentality is also clearly on show but also the ‘emotional’ connection with sectors or assets they have an affinity with.  Seasoned investors park emotions at the door.

“New investors who sense a generational-buying moment but do not have much background in the equity space,” Citi chief U.S. equity strategist Tobias Levkovich said in a note to clients in May. “We have heard anecdotally about younger individuals with less market experience viewing the March plunge as a unique time to start portfolios and often crowding into the tech arena, purchasing the stocks whose services or products they know and use.”

And herein lies a potential opportunity for cryptocurrencies, gold and silver.  Robinhood does not allow shorting on its platform.  If users turn bearish they don’t have an opportunity to short shares.  That will inevitably see them look for risk-off options.  The platform already has bitcoin trading available and the usual gold and silver ETF’s are there too.  When the market inevitably rolls over, the same herd who bought the dip in March (where Robinhood had triple the new sign ups) with their government cheques may well see the next downturn as confirmation that the first was just a hope or bull trap rally and there could be a race for the exits to uncorrelated hard assets such as gold, silver and bitcoin.

Just as there is an affinity with the FAAMG shares with millennials there is also with Bitcoin.  Whilst Bitcoin has seen over 30% gains this year and its ‘silver’ cousin Ethereum up 84% this year, Bitcoin has been range bound for the last 2 months whilst US shares have surged back from the March low.  The usually volatile investment has been one of the least volatile and dropped off the millennials radar.  From Bloomberg:

“The largest digital asset has traded in a narrow band between $8,500 and $10,000 for the past two months, the longest it’s gone without substantial movement this year. In addition, its 14-day Relative Strength Index (RSI) -- which measures the magnitude and persistence of price movement -- is at 48.5, a neutral point that underscores its muted range.

“If it breaks above its trend line, it’s going to get some nice momentum,” said Matt Maley, chief market strategist at Miller Tabak + Co.

Maley sees demand coming from relatively young retail traders who use platforms like Robinhood, the same cohort that’s sometimes been cited for driving the record comeback in stocks from the worst of their coronavirus swoon. While professional investors have scoffed at some of the youngsters’ hubris and willingness to ignore danger signs, the thousands of small-time players could generate a frenzy if Bitcoin climbs past its 2020 high of $10,400, according to Maley.

“They’re playing in another sandbox right now, but they’re keeping their eyes on all the other sandboxes because they know that something like Bitcoin can make them a big profit very quickly,” Maley said. If it reaches a new high for the year, “interest in that is going to pick right back up and all those momentum players are going to say, ‘I’m in.’”

Benn Eifert, managing partner of QVR Advisors, says he sees a lot of overlap between the Robinhood types piling into shares of bankrupt companies, for instance, and those who were involved in crypto in 2017.

“It’s a social media-like dynamic,” he said. “Someone points out a stock that’s moving and posts some charts, an influencer says, ‘Ok we’re buying it, buy the calls’ and then many people pile in.””

However the likely drivers and hence public narrative of the rotation this time will likely be the growing understanding of the debasement of money that has occurred through the Fed and other central banks having propped up the financial asset prices that are crashing.  It is often said that whilst crypto has arguably stolen a lot of gold and silver investors, it has also been the single biggest catalyst for millennials questioning what exactly money is per se, and started the inevitable conversation about gold and silver’s historic role in money.  Crypto has likely introduced as many new investors to gold and silver as it has stolen.  We’ve always maintained they are a logical co-existing investment strategy.

The combination of the ‘Robinhood’ millennial herd, the extent of information sharing afforded to and embraced by this herd, and the value proposition that gold and silver will obviously present alongside bitcoin could see a large and new cohort rush to all three when this market rolls over.