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Imagine yourself in early 2009. You’ve just heard about a new technology called Bitcoin that you believe can change the world. It’s digital money, or perhaps someday will be, and carries the promise of a future free from fiscal oversight by governments, banks, and more. You’re interested in learning more about it and, of course, acquiring some of it for yourself. But where do you go to get it?
When Bitcoin first launched, there were really only two ways to get it. You could mine it by plugging your computer into the Bitcoin blockchain. Or you could arrange a peer-to-peer exchange over a Bitcoin forum with someone who owned the cryptocurrency, a similar experience to buying something on Craig’s List or Facebook Marketplace. You’d likely have to meet with your trading partner in person to have a better chance of ensuring that the exchange went over according to plan. Overall it was a rather non-futuristic way to acquire futuristic money.
Fast forward twelve years and the process of trading cryptocurrencies has changed immensely. Granted, there are still a lot of crypto swaps that happen peer-to-peer, and many people swear by it. But the vast majority of crypto purchases happen on cryptocurrency exchanges. At first, cryptocurrency exchanges existed in what is now colloquially referred to as the “wild west” of crypto. It was a time in which you could exchange your crypto without worrying about government regulators breathing down your neck. It was also a time in which your crypto could be gone in an instant if your cryptocurrency exchange went down (just ask Mt. Gox users) - much more so than the present day.
Regardless of what cryptocurrency critics may say, the wild west days of cryptocurrency have seemingly been tamed. Regulators in most countries are actively developing legislation that will allow them to oversee the still-nascent cryptocurrency sector. It’s common to hear about traditional financial companies, like PayPal and Square, facilitating massive amounts of cryptocurrency transfers. And the crypto native exchange Coinbase recently went public on a United States stock exchange and joined the ranks of name brand corporate giants with a huge amount of fanfare. Such is the position in which a relatively recent entrant to the cryptocurrency game, Robinhood Markets Inc., finds itself.
Robinhood Takes Center Stage
Robinhood was founded in April of 2013 by Baiju Bhatt and Vladimir Tenev, who envisioned bringing access to financial markets to people of all walks of life through the company’s app. Robinhood has seemingly been successful to a certain degree as the company claims to have pioneered zero-commission securities trading and serves upwards of thirty-one million users, most of whom interact with the app on a daily basis.
Robinhood originally started out by providing its users with the ability to trade most corporate stocks and various exchange-traded funds. However, a few years after going into the stock trade, Robinhood introduced the ability for its users to buy, sell, and hold several cryptocurrencies directly in their Robinhood account. And cryptocurrency transactions have quickly become a substantial piece of Robinhood’s business model. The company’s filing with the SEC to go public earlier this month stated that revenue from cryptocurrency services makes up nearly twenty percent of the company’s overall revenue. This is indicative of Robinhood’s success as a company. However, it may be even more indicative of the significant interest from traditional retail market participants in taking part in the non-traditional cryptocurrency markets.
While Robinhood’s focus on cryptocurrency has brought it some measure of success, it has not been without controversy. The company has often run afoul of many adherents to the cryptocurrency space with its decision to restrict movement of cryptocurrency into and out of customer accounts. In fact, there’s a certain amount of irony to the situation. Cryptocurrency, often heralded as taking power out of the hands of big governments and companies and giving it back to the individual, is being championed by a big company who refuses to allow its individual users to withdraw their crypto holdings.
Many participants in the cryptocurrency space commonly denounce Robinhood’s status as a cryptocurrency exchange and refuse to execute their trades on the platform. But are they right? Is it an unspoken requirement that users be able to withdraw their holdings from a cryptocurrency exchange? I’ll let you be the final judge, but not before we dissect the basics on cryptocurrency exchanges.
The ABCs of Cryptocurrency Exchanges
The primary purpose of a cryptocurrency exchange is to facilitate the transfer of blockchain-based assets. We commonly think of crypto-to-crypto or fiat-to-crypto transactions as the bread and butter product offered by the platforms, but that leaves quite a bit of functionality unaccounted for. Many cryptocurrency exchanges these days also facilitate the transfer of other assets like NFTs (Non-Fungible Tokens), as well as digital representations of real-world assets like real estate and corporate stocks. Additionally, cryptocurrency exchanges have begun to set themselves up as one-stop gateways into the crypto world, offering services like crypto-backed lending, crypto and blockchain education, crypto-based debit and credit cards, and more.
There are two primary types of cryptocurrency exchanges: centralized and decentralized.
The most well-known centralized cryptocurrency exchanges are Coinbase and Binance. Both are run by companies that resemble the large corporations that we have become familiar with over the decades. They are run by CEOs and executive teams, have armies of employees to service the companies’ products and customers, and are subject to the whims of government regulators in whatever countries they choose to operate.
While government and corporate oversight are often cited as the main drawback of centralized cryptocurrency exchanges, there are perhaps a few benefits to speak of. As an example, if you have the misfortune of losing access to your account on a centralized exchange, you’re much more likely to be able to speak to someone about regaining access than if your account was on a decentralized exchange.
Decentralized exchanges (DEXs) have seen a surge in popularity during the cryptocurrency bull market and Uniswap and PancakeSwap are two of the larger protocols operating as DEXs. Using a decentralized exchange is a different experience altogether from using a centralized exchange. A decentralized exchange operates in an autonomous fashion and is completely based on software code and smart contracts on a blockchain. If the protocol experiences a minor or a catastrophic failure, the protocol’s development team may or may not have the ability to provide any relief to users.
The ability to freely trade cryptocurrencies and other blockchain-based assets without interference from regulators or corporations is one of the most appealing features of decentralized exchanges. Additionally, a large number operate in a non-custodial fashion, meaning that you do not have to place your cryptocurrency in someone else’s cryptocurrency wallets in order to execute trades.
Hold Up. Do You Think Robinhood Crypto Is Good Or Not?
I’ve used a variety of cryptocurrency exchanges, including Robinhood, during my time in the cryptocurrency space. I no longer use Robinhood Crypto for several reasons, but by far the biggest was my inability to move my crypto holdings off of the platform. I’m a strong proponent of cryptocurrency’s ability to give financial freedom back to its users and not having even the slightest control over movement of my cryptocurrency was a dealbreaker.
That’s what I think about it, but don’t rely on my experience. Do your own research and make the decision that is best for you.
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