Why are investors still loyal to Robinhood, Coinbase, and Binance?

It’s a strange quirk of human nature that we all ignore the obvious things that are right in front of us.

We just don’t want to believe we’ve been wrong about something - this is especially true of anything financial.

Nobody wants to look like an idiot in front of their friends and family for having made a crazy decision which everybody else could see but you.

Bernie Madoff and his Ponzi schemes are one of the obvious sagas that come to mind. Although his activities were on a different scale, some of the household names which have emerged in cyberspace lately are wandering into the same dodgy territory.

Three of them – Robinhood, Coinbase, and Binance – in different ways, have been guilty of some serious misconduct and scandals recently.

Despite this, millions of investors remain loyal and are turning a blind eye to the shenanigans going on behind the scenes.

Robinhood Markets (to give it its full name) has had its share of “issues.”

In October 2018, Bloomberg News reported that roughly half of Robinhood's revenue comes from order flow fees, which the company confirmed on its official website.

According to the Wall Street Journal, Robinhood "appears to be taking more cash for orders than rivals" by up to 60:1.

In December 2019, the Financial Industry Regulatory Authority fined Robinhood $1.25 million for failing to ensure customers received the best deals. In December 2020, a group of disgruntled investors sued Robinhood in a class action.

Then, in July 2019, Robinhood admitted to maintaining passwords in clear text and readable form on internal systems. When asked how many customers were affected by the error, Robinhood replied it didn't know since it had found no evidence of abuse.

Around 2,000 Robinhood Markets’ accounts were compromised in 2020, showing the attacks were far larger than first assumed.

Another problem involves a flaw in Robinhood Gold identified by a member on the Wall Street Bets subreddit in November. This weakness enabled users to borrow a limitless amount of money by selling leverage-purchased covered calls and using the premium to acquire greater leverage for future stock purchases.

Customers of WallStreetBets reported the "unlimited money cheat code" and Robinhood closed the exploiters down. Nevertheless, the exploit cost several users six-figure sums.

Then, on Monday, March 2, 2020, Robinhood clients could not conduct any platform actions, including opening or canceling trades, as the Dow Jones saw its largest day point gain ever.

During the outage, the S&P 500 index surged almost 4.6%. Robinhood said it will give compensation on a case-by-case basis.

Finally, in June 2020, a University of Nebraska student named Alexander E. Kearns committed suicide after finding a US$730,000 negative cash balance in his Robinhood margin trading account.

It later proved that the negative balance was transitory. In his suicide letter, Kearns blamed Robinhood for allowing him to take on too much risk.

Despite these problems, a new generation of young investors sees Robinhood as the place to trade “stonks”. For them, the hassle of opening up a new trading account, learning a new platform, and getting to know a new organization is too much bother.

Coinbase, too, has had many issues.

Hackers took money from consumers' Coinbase accounts on many occasions

CNBC polled Coinbase users throughout the US and uncovered hundreds of complaints about the company.

According to the interviews and online reviews, Coinbase provides poor customer service after account takeovers.

Many customers report it being difficult to reach customer services and that Coinbase has not paid them for their losses.

Former employees claim that customer service standards altered as demand escalated.

As a result, a Coinbase official said that the company is working on improving customer service and adding more support channels soon.

Millions of users deposited dollars and traded them for bitcoin and ethereum on exchanges like Coinbase, which was widely used and trusted initially.

Unfortunately, many users found their accounts empty, and poor customer service from Coinbase left them angry and stranded.

The FBI claims that bitcoin transactions are irreversible and if criminals get access to a bank account, money is stolen in minutes.

This is a major issue, given Coinbase, which went public in April, is worth almost $65 billion. According to the company, it manages $223 billion in assets and has 68 million members in over 100 countries.

Coinbase's insurance does not protect individual accounts, according to the CFPB's Regulatory Response Team.

After gaining access to a user's Coinbase account, hackers sell it on the dark web. Credit cards are worth a few bucks compared to the value of stolen Coinbase accounts.

Coinbase is a hot topic on Reddit and Twitter. Coinbase established an online knowledge base with answers to frequently asked questions but has already phased out live chat help despite the ongoing problems.

China's Binance is one of the top 20 cryptocurrency exchanges by trading volume. Pairs it trades, like NEO/BTC and GAS/BTC have exceptionally high trading volumes on the market.

Binance, though, has a woeful catalog of problems both past and present.

Prior to China's government banning cryptocurrency trading in September 2017, the firm moved its servers and headquarters from China to Japan.

Despite competition from Coinbase and others, it was the biggest cryptocurrency exchange in January 2018 with a market valuation of $1.3 billion.

According to reports, Binance plans to create an office in Malta now in response to increased restrictions in Japan and China.

From a customer perspective, none of this really matters - what they want is customer service which helps them and answers their queries and issues.

Binance seems to be an expert at not doing this. Forums and chat rooms are awash with complaints about the company.

On May 7, 2019, Binance stated hackers had stolen 7,000 Bitcoin, valued at roughly $40 million - the company halted withdrawals for two weeks while it worked on securing the platform. Nobody could access their accounts.

Bloomberg reported on October 28, 2020, that Binance and Changpeng Zhao (the company’s Chairman) constructed a complex business structure to fool US authorities and surreptitiously benefit from cryptocurrency investors in the US. 

According to Forbes, Binance prohibits access from US IP addresses, but they would teach potential customers how to evade such geographic restrictions.

In May 2021, the IRS and the US Department of Justice announced that Binance was under investigation for money laundering and tax evasion.

These three companies are not junior players. They are each pioneers in their own right and have built client bases of millions.

So, how have they survived this list of problems and scandals?

In a word - inertia.

In the notoriously complicated finance industry, these platforms make it easy for customers to buy and sell shares and cryptocurrency.

In the case of Robinhood, for example, teenagers were making thousands of dollars betting on companies like GameStop without ever having researched the company in the traditional sense of looking at profit-and-loss accounts and other financials.

Robinhood makes stock investing like falling off a log.

Replicating this ease of use for customers of Robinhood, Coinbase and Binance will prove tricky. Despite all the appalling customer service, the outages, the critical reviews, and the hassle, either misguided loyalty or a "better the devil you know" attitude is keeping people on board.

There is a large element of "it's been okay for me so far, so no problem" in many of the comments on chat rooms and forums.

Commentators simply view it as a minority having some bad luck.

With bitcoin tipped to go to $200,000, and the stock market showing no sign of a major correction, there is little impetus to change providers.

The next couple of years will be extremely interesting for users of all three players.