Investing is tricky and risky, as nothing guarantees your investments will bear fruit. The world of investing is difficult to navigate and challenging to master. But that’s why investment platforms exist to simplify the process and steps to making your first investment. 

Of all the investment platforms, Robinhood emerges as one of the most popular. This is due to the platform’s commission-free trading, which is highly appealing to investors, among other things. While every investor acknowledges the allure of Robinhood, some do have their reservations. After all, what would happen if Robinhood suddenly went bankrupt? What would happen to your investments? 

If you’re asking yourself these questions, fear not, as we will answer, “What happens if Robinhood goes Bankrupt.” Let’s begin.

What Is Robinhood’s Business Model?

Robinhood’s business model revolutionized the investment landscape by eliminating trading fees and reducing entry barriers. Because of that, the platform attracted a large user base, primarily young and inexperienced investors seeking a simplified investment experience. So without the trading feed, how does Robinhood make money? 

The platform generates revenue through various sources, including payment for order flow, interest on margin accounts, and premium subscription services. But despite all that, investors have concerns regarding Robinhood’s establishment in the financial investing industry. 

Fear not; even if Robinhood doesn’t have the pull of other companies, such as Fidelity or Vanguard, it is still a reliable investing platform with a solid business model.

This should eliminate most of your concerns. But hypothetically speaking, there’s always a risk of Robinhood going bankrupt. After all, we are living in financially troubling times where nothing is guaranteed. So, what happens if Robinhood goes bankrupt? 

What Happens If Robinhood Goes Bankrupt?

Before we answer the question, we must emphasize that Robinhood is highly unlikely to go bankrupt. But for argument’s sake, let’s explore the potential outcomes. 

Your Investments Are Insured

Frightened investors should know that their investments, including cash, stocks, options, and EFTs, are fully insured by SIPC. Robinhood is a SIPC member, meaning that the insurance will cover a significant amount if it goes bankrupt. How much? Well, SIPC covers up to $500,000 of your portfolio, of which $250,000 includes cash holdings. 

Let’s elaborate further by giving you an example.

Let’s say your Robinhood account contains $150,000 in stocks and other securities and $50,000 in cash. That means you’re fully covered. But let’s say your account has $300,000 worth of securities and $300,000 worth of cash. Despite both going under the $500k threshold, the insurance will only cover $250,000 worth of securities AND $250,000 of cash. 

This tells us that if Robinhood goes bankrupt, the SIPC insurance will cover a portion of your portfolio but not all of it. Ultimately, it depends on your portfolio’s worth. If you want to be fully protected, keep at most $250,000 worth of securities and $250,000 worth of cash in your Robinhood account.

A Merger or Acquisition Is Likely

There’s a big chance Robinhood will be acquired or merge with another company if it goes bankrupt. As we’ve seen numerous times throughout history, whenever a big financial company goes bankrupt, competitors will scramble to acquire it or merge with it. 

That’s not to say that the process will go smoothly in any way. After all, mergers and acquisitions are notoriously complex dealings with many possible outcomes for the companies and their customers. 

So what are these outcomes? A likely outcome would be for the process to happen in the background. Casual investors might not even notice it and will not notice any changes on the app. Another outcome is for all customer data and assets to be moved to another app owned by the acquiring company. 

But regardless, if a merger or acquisition happens in case of Robinhood going bankrupt, you’re most likely going to be fine along with your assets and investments. 

Should You Be Worried? 

No business is safe from bankruptcy, no matter how financially stable it appears, especially for brokerages. Robinhood is by far one of the most popular brokerage industry players, which means certain factors can greatly impact it. 

One of the biggest worries investors have is a potential recession. If a recession happens, it will put the economy in a difficult position. That means investors will likely sell their investments and pull money from the app. This could have devastating consequences for Robinhood and other brokerages. 

Another risk is related to Robinhood’s business model, which allows for direct crypto investing. Robinhood is one of the few online platforms that offer this option. If more would implement it, it could reduce Robinhood’s market share in the crypto market as a brokerage company. Furthermore, crypto is a highly volatile asset, treading on a thin regulation line. 

All in all, you should and shouldn’t worry about Robinhood going bankrupt. While you should know what to do if it goes bankrupt, you shouldn’t live in fear of it happening. 

Wrap Up

We hope this article answers the question, “What happens if Robinhood goes bankrupt?” Robinhood is one of the most popular investments and online brokerage platforms, with millions of active users. The platform might not be as established as other players in the industry, but it has a solid business plan.

You could argue that Robinhood can easily go bankrupt, but you can also make a counterargument as to why it will not. Simply said, Robinhood is still here, and we have no way of knowing if bankruptcy will ever happen without having insider knowledge or knowing one of the executives at the company. 

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