Well known mobile trading platform Robinhood has restricted its users for trading in cryptocurrencies on last Friday. This action was taken a day after Robinhood halting the buying of red-hot stocks like those of GameStop. These sudden actions of Robinhood have ranged its users.
On Friday, many users have reported that the app has halted the instant deposits for cryptocurrency purchases. Where the users can purchase currencies by only using the funds that they have already deposited in their accounts.
- Robinhood’s plans to go public this year is in jeopardy
- Robinhood’s customers have filed a class action lawsuit against the company
- Cashing out Bitcoins from the platform would create a taxable event
Why Robinhood restricted crypto trading?
Robinhood spokesperson has stated to CNBC that, “Due to extraordinary market conditions, we’ve temporarily turned off Instant buying power for crypto.” Further, the spokesperson added, “Customers can still use settled funds to buy crypto. We’ll keep monitoring market conditions and communicating with our customers.”
Yet, Robinhood did not specify any aspect about the restriction, the ‘extraordinary market condition,’ and what cryptocurrencies face the restriction, either in their blog post nor in the statement made to CNBC.
Last Friday, Bitcoin sore in value by nearly 20% (based on Messari market data). It was caused, after Tesla CEO Elon Musk changed his Twitter bio to ‘#bitcoin’ which was previously blank. This social media attention caused a quick spike in price of Bitcoin. Musk said in a cryptic tweet that, “In retrospect, it was inevitable.”
Apart from price hike in Bitcoin, the surge in value of Dogecoin also contributed to Robinhood’s initiatives. Dogecoin is a digital coin based on the popular ‘doge’ meme and it upheld a surprising price hike of nearly 800% last Friday. This currency which was launched as some jest, has gained significant attention of the market.
Robinhood under pressure
With the recent actions taken by Robinhood, company’s prospects did not seem favorable. This will put Robinhood’s plans to go public this year in jeopardy. Where the company being blamed by both customers and the law makers.
Several politicians have already issued statements of outrage about the actions of Robinhood, as they were considered to be threatening for retail investors. Robinhood’s customers have filed a class action lawsuit against the company, according to a report by Yahoo Finance. They are currently in an emergency process of raising $1 Billion new funding to reconcile its cash shortage.
Consequences of exiting Robinhood
Following the moves made by Robinhood, users doubt whether it’s a reliable platform to hold their cryptocurrencies. Thereby they have started to move their crypto assets to other platforms, which isn’t possible right now.
This has shrunken their options in leaving the platform to sell their cryptocurrency for cash. Though it’s a viable option, it has serious tax consequences. Cashing out Bitcoins would be taxable, where it will get charged with capital gains tax. Switching of trading platforms would make it likely to incur a tax liability.
This taxation can only be avoided by choosing a cryptocurrency exchange which support both deposits and withdrawals. Here, when moving for a different platform it will be a transfer of coins from one wallet to another. These transfers between wallets are non-taxable.
Conclusion
Many retail investors have been introduced to the cryptocurrency market by Robinhood. The user-friendly interface of the platform have attracted attention of beginner investors, as it was highly convenient for them to invest in cryptocurrencies. The recent incidents have reveled a flaw in the system, which the inability to withdraw crypto assets without falling into tax trap.