Bitcoin is pretty much back in 2020. The cryptocurrency recently broke to its all-time high, finally surpassing the 2017 high of about $ 20,000. It currently has a value of over $ 23,000 per coin. Square (NYSE: SQ), a fintech company known for outlets (POS) and peer-to-peer (P2P) payments, has made numerous investments and announcements involving bitcoin, which may have led investors to think the two securities should move in tandem.
However, this opinion cannot be further from the truth. Bitcoin has no direct impact on Square’s business (at least not yet). Here’s why.
What Square does
Square has made several investments in crypto space. He was most famous in early 2018, when he started allowing Cash App users to buy and sell bitcoin. This was not revolutionary (many other services allow you to buy cryptocurrencies), but it was treated as a marketing tool. This is probably a big reason why the consumer-focused personal finance app has quadrupled its customer base in the last three years.
Another initiative involves a dedicated team of employees called “Square Crypto” who is helping to build “open source projects aimed at making bitcoin the currency we prefer on the planet”. It’s a bold mission statement – but with only six employees at the moment, this probably won’t have much of an effect on Square’s bottom line any time soon.
Finally, the company announced in October that it had bought bitcoin worth $ 50 million (then) or 4,709 coins. It is difficult to decipher why the company decided to do that, but it stated that the purchase was made in order to help “expand” the balance sheet. Priced at $ 23,500, Bitcoin in Square’s balance sheet is worth just over $ 110 million today. Given that Square’s market capitalization currently exceeds $ 100 billion, the profits on its bitcoin holding are intangible.
Why is it overdone
Every quarter Square tells investors how much revenue it brings from bitcoin. That number rose to $ 1.6 billion in the third quarter, leading to headlines about 1,000% bitcoin revenue growth. While these parts can generate a lot of clicks, they are actually quite deceptive. Whenever Square buys bitcoin for its users, it is forced to count it as revenue, even though the margin it ignores is negligible. In fact, of the $ 1.6 billion in bitcoin revenue that brought a square in the last quarter, only $ 32 million turned into gross profit.
Since Bitcoin revenue inflated Square’s top line (it accounted for over 50% of sales in the last quarter), investors should not pay attention to this. Instead, they should focus on assessing what Square can do with bitcoins to encourage use second products that make real money for his business. For example, Square has just announced that cash app users can earn bitcoin through the cash back feature on the Cash Card (the app’s debit card). The company will again have negligible margins on the bitcoin it issues, but will hopefully stimulate users to spend more with its debit card, a product that brings real profits.
Think of these features of bitcoin as an effective marketing tool, but not as something the company will make money on – at least not in the next few years. It may be exciting to see bitcoin prices rise, and these price increases could cause Square’s stock price to move in the short term. However, bitcoin prices are not currently affecting the core business, and this is what will drive stocks in the long run.