Why Prediction Markets Could Be Bigger Than Crypto for Robinhood

Robinhood Markets (NASDAQ: HOOD) generates significant revenue from its cryptocurrency trading business. Unfortunately, because the crypto market is highly volatile, the revenue Robinhood generates from this segment can be fairly unpredictable from year to year. So, even though it might be a growth driver today, it could be the opposite later. Case in point, in the fourth quarter, Robinhood's crypto revenue declined by 38% year over year to $221 million.

Thankfully, the fintech specialist has been ramping up another opportunity that could eventually become a bigger, more reliable source of revenue: prediction markets.

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Robinhood fastest-growing business

Robinhood has made several moves to boost its exposure to prediction markets over the past year. It notably established Rothera, an independent derivatives exchange in partnership with Susquehanna International Group, a privately held trading firm. Management estimates Rothera could launch in mid-2026. Robinhood has noted that prediction markets have become its fastest-growing segment by revenue. There is at least one reason they could become a more reliable growth driver than cryptocurrency in the future: there is always something to bet on.

Robinhood allows its users to speculate on and try to predict the outcomes of events -- using event contracts with two possible outcomes -- across sports, politics, culture, and more. Some events, like elections or major sporting tournaments, will likely attract more engagement than others. However, there are several such major events throughout the year -- every single year -- and plenty of minor ones. Various others occur every few years (presidential elections, World Cup, etc.), and there are enough to keep people interested year in, year out. That's why, if Robinhood can scale this business enough, it could provide a somewhat consistent source of growth, which the company can hardly count on its cryptocurrency business to do.

Now, to be clear, there are significant risks with Robinhood's ventures in prediction markets. One of the most important is the regulatory landscape. Prediction markets look dangerously like gambling (some would argue it is gambling), an activity that comes with significant regulatory scrutiny. As we speak, some lawmakers are trying to introduce bills that would, in some way, put added restrictions on prediction markets, and the scrutiny may intensify as they become increasingly popular.

That could lead to significant problems for Robinhood down the road. However, provided the regulatory landscape remains somewhat friendly, Robinhood's decision to pursue this opportunity may pay rich dividends down the road. What does that mean for investors? Robinhood continues to establish itself as the financial institution of the future, with a vast array of products and services, including traditional banking ones, and others that are increasingly becoming popular, such as crypto investing and prediction markets.

Meanwhile, the company's ecosystem continues to grow, revenue and earnings are increasing, and it is arguably slowly building switching costs. Robinhood has an ambitious vision for the future, and the stock may significantly outperform broader equities if it can make it a reality.

Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.