Robinhood restricts crypto trading as Dogecoin soars 300 percent

Robinhood restricts crypto trading as Dogecoin soars 300 percent

Robinhood has started restricting trading in cryptocurrencies this morning, just as the price of joke cryptocurrency Dogecoin has soared more than 300 percent in 24 hours. CNBC reports that Robinhood users started noticing instant deposits for cryptocurrencies were no longer working on Friday morning, and the company has confirmed it has put restrictions in place.

“Due to extraordinary market conditions, we’ve temporarily turned off Instant buying power for crypto,” says a Robinhood spokesperson in a statement to CNBC. “Customers can still use settled funds to buy crypto. We’ll keep monitoring market conditions and communicating with our customers.”

Dogecoin came to life in 2013 off the back of a Twitter joke — a play on bitcoin and the doge meme. Its price started soaring yesterday, and Dogecoin currently stands at a more than $7 billion market cap thanks to a huge volume of transactions over the past 24 hours.

The market activity and restrictions over the past 24 hours have now made Dogecoin a popular meme among the r/WallStreetBets investors. Dogecoin has been consistently spammed in the WallStreetBets Discord server over the past couple of days.

Bitcoin is also on the move, up nearly 20 percent over the past 24 hours. Tesla CEO Elon Musk also changed his Twitter profile to include #bitcoin and tweeted “in retrospect, it was inevitable.”

Robinhood’s latest crypto restrictions come less than a day after the company moved to restrict its users from buying or trading any of the popular Reddit r/WallStreetBets stocks, including GameStop ($GME), AMC ($AMC), BlackBerry ($BB), Bed Bath & Beyond ($BBBY), Nokia ($NOK), and more.

It’s a move that has been met with widespread criticism, and Google was forced to salvage Robinhood’s one-star rating on the Google Play Store by deleting nearly 100,000 negative reviews after unhappy users review-bombed the app. Robinhood says it will now allow “limited buys” of stocks like GameStop starting Friday.

Sell GME in Robinhood, yes; buy it, no – trading app acts

Popular stock trading app Robinhood has responded to the GameStop (GME) craziness by allowing users to sell GME, but not buy it. The company claims the change was made due to ongoing volatility.

Background

As we noted yesterday, GME was one of several stocks whose value shot up when a bunch of Reddit users entered into a coordinated buying spree.

Over the last week, the Reddit forum WallStreetBets has helped push stocks like GME (GameStop) to new highs […] GameStop (GME) stock has risen by over 1,350% during the last month, driven in large part by the WallStreetBets subreddit. Other companies have also benefited from this push, including AMC Entertainment Holdings (AMC), BlackBerry (BB), Nokia (NOK), Express (EXPR), and more.

Any significant increase in demand for a stock tends to push the price up, but there was an extra factor in this case. The Redditors had chosen stocks whose prospects were extremely poor, GameStop being a case in point: a retailer of physical games media in an already declining market, further hit by a pandemic.

There was method in this apparent madness. When a stock is in decline, investors will often “short” the stock. This means they borrow stock to immediately sell it. They then wait for the price to fall, buy the stock for less than their selling price and return it to the owner, pocketing the difference. More specifically, the coordinated action made heavy use of options, as this lets you get more bang for your buck.

These options have an expiry date, however, and if the price goes up instead of down, they are forced to buy the stock at a higher price, taking a loss. If the price is rising rapidly, then all the shorters will pile in to buy the stock in order to minimize their losses, and that buying frenzy pushes the price higher. It then becomes a vicious circle known as a “short squeeze.”

There does, however, come a point where reality catches up with an inflated stock price, and that’s why Robinhood has chosen to act. (Update: I gave the company too much credit.)

Robinhood now only lets you sell GME et al.

Much of the coordinated purchasing was done using the Robinhood app, as it’s an easy and inexpensive way for ordinary people to buy and sell shares. But it also attracts novice investors who may not realize they are buying into a bubble that is bound to burst.

For that reason, the company says in a blog post that it will no longer allow users to buy the relevant stocks, only to sell them.

Our mission at Robinhood is to democratize finance for all. We’re proud to have created a platform that has helped everyday people, from all backgrounds, shape their financial futures and invest for the long term. We continuously monitor the markets and make changes where necessary. In light of recent volatility, we are restricting transactions for certain securities to position closing only, including $AMC, $BB, $BBBY, $EXPR, $GME, $KOSS, $NAKD and $NOK. We also raised margin requirements for certain securities. Amid significant market volatility, it’s important as ever that we help customers stay informed.

It has also written a new post about stock volatility.

Volatility is kind of like turbulence during a flight. You don’t know when it’s going to happen or how severe it will be. You can take steps to steel yourself when volatility strikes though. Just like passengers might return to their seats and buckle up, investors can conduct a personal review, making sure that they’re comfortable with how they’ve balanced their assets between cash, investments, and other individual needs.

The tl;dr is that if you’re investing for the long-term, stock volatility may not be an issue. But if you’re responding to short-term movements and hoping to make a quick buck, that’s a dangerous game.

Speaking of risk, if you are using Robinhood, it’s a good idea to switch on 2FA.

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Stocks on the Robinhood restricted trading list like AMC and Koss surged on Friday

A man walks past an AMC theatre amid the coronavirus disease (COVID-19) pandemic in the Manhattan borough of New York City, New York, U.S., January 27, 2021. Carlo Allegri | Reuters

Stocks on Robinhood’s restricted trading list jumped on Friday, after the online brokerage said it would resume limited trading in the heavily shorted names. GameStop surged 113% at its session high shortly after the opening bell. The stock was subsequently halted for trading due to volatility. Throughout the session GameStop bounced around in volatile trading, before ultimately closing 68% higher. For the week, the stock gained 400%. Koss advanced 52%. AMC Entertainment and Express rose 54% and 28%, respectively. Each stock was halted earlier due to volatility. Naked Brand Group gained 18%. For some of the stocks, Friday’s spike erased heavy losses sustained during the prior session after Robinhood and other retail brokerages announced restrictions on a handful of stocks, including in some cases not allowing customers to buy new shares and only sell. GameStop, for example, slid 44% on Thursday.

Robinhood’s restricted list

In a statement late Thursday announcing that it would resume trading in the blacklisted stocks, Robinhood said: “We’ll continue to monitor the situation and may make adjustments as needed.” The start-up added that its earlier decision to restrict trading — which angered many users — was necessary in order to comply with capital requirements mandated by the SEC for broker dealers. Brokerages like Robinhood often lay out money to investors to make trades. If a large number of the investors are hit with big loses and can’t cover the borrowed funds, the brokerages could face huge losses. Interactive Brokers took similar steps as Robinhood, with both also raising margin requirements on certain securities. It is not unusual to raise margin requirements, but the move to restrict trading was more extreme, which angered and confused some users. The decision followed retail investors flocking en masse to some of the market’s most heavily shorted names, forcing hedge funds and those on the other side to rush to cover their losses. This, in turn, drives share prices even higher. Investors turned to popular forums like Reddit’s WallStreetBets board to discuss their trades.