On Tuesday, disgraced stockbroker Jordan Belfort (also known as “The Wolf of Wall Street”) predicted that Robinhood’s future is “toast.” Given everything the investment app encountered last week, Belfort’s prediction should come true. However, I am confident that the impending chaos will soon boil over and leave Robinhood mostly unscathed.
For those unfamiliar with this incredibly complex situation, Robinhood found itself under fire after a group of Reddit users completely blew up the stock price of the electronic retailer GameStop by purchasing thousands of shares. The Redditors’ actions stood in stark contrast to the actions of many Wall Street elites, who had written off GameStop as a declining, soon-to-be worthless corporation. Who could blame them? GameStop’s value was less than $5 per share for most of 2020. And as anyone who’s been to GameStop knows, this value is still greater than the compensation you receive for returning a video game!
Jokes aside, GameStop stock began to recover last month, when Chewy’s Ryan Cohen was added to the company’s board of directors. But the Redditors made the real difference, as GameStop’s market value nearly doubled from Jan. 25 to Jan 26. The next day, it opened at a ridiculous $347 per share. In the midst of all this chaos, Robinhood suspended all buying of GameStop stock on its app.
Almost immediately, Robinhood was called out for suppressing the freedom to trade—and rightly so. The app is popular with young investors, who tend to distrust traditional hedge fund managers, who they hold responsible for the 2008 financial crisis. Given its base and mission to “democratize finance for all,” the fact that Robinhood acted like a shady Wall Street firm has led to several lawsuits against the app.
But as I stated earlier, there is no cause for concern; Robinhood’s reputation is battered, but not shattered. Since the GameStop fiasco, $3.4 billion in donations have rolled in for the app. The dozens of lawsuits facing Robinhood—identified by Jordan Belfort as the likely culprit for the app’s unraveling—won’t matter all that much in the end. $3.4 billion will certainly cover Robinhood’s legal fees, and whatever is left should handle the majority of out-of-court settlements.
This is, of course, assuming that Robinhood’s lawyers are smart enough to realize they will not win most cases contending an interference with the free market. The suspension of GameStop purchasing has been condemned across the political spectrum, with everyone from Alexandria Ocasio-Cortez to Ted Cruz and Donald Trump Jr. speaking out against it.
As long as donations continue to pour in, Robinhood will make it out alive. But even if they dry up, the company’s censorship of common stock traders has given it a seat at Big Tech’s table. Since it has gone there and clearly chosen a side, it will be difficult (but not impossible) for Robinhood to win back the trust of its base.
Taking on Wall Street and its hedge funds has seldom, if ever, yielded a favorable outcome for its challengers; Robinhood’s GameStop controversy is no exception. But to create such exceptions in the future, we the investors must take a stand … and maybe spend a little more time lurking on Reddit.