Bitcoin has been a hot topic in the investing world recently, and it isn't hard to see why. The leading cryptocurrency recently hit a fresh all-time high and is up by about 240% so far in 2020. Plus, institutional interest from hedge funds and corporations has increased to its highest level yet.
However, whether bitcoin has a bright future -- either as a digital currency or as a store of value -- remains to be seen. This makes bitcoin a highly speculative asset to own. If you're a believer in the long-term use cases for bitcoin, another way to play it would be to buy a stock that could make billions if bitcoin does well, but that will be just fine if it doesn't. Fintech leader Square (SQ 0.69%) is definitely one of them.
Square's bitcoin operation is huge
Square could benefit from rising bitcoin prices or mainstream acceptance in four main ways:
- Square's Cash App customers can buy, sell, and hold bitcoin quickly and easily through its app. In the third quarter, more than $1.6 billion worth of bitcoin was bought or sold through the Cash App. Pantera Capital, a hedge fund, has estimated Square now accounts for 40% of bitcoin volume in the U.S.
- Square has an entire cryptocurrency division (Square Crypto) that builds and funds projects with the intention of helping transform bitcoin into the world's preferred currency.
- Square recently bought $50 million of bitcoin as an investment to hold on its balance sheet. It did so when bitcoin was worth roughly half its current value. If certain experts are correct and bitcoin rises to a six-figure price tag, this could certainly be a needle-mover for Square. Plus, I wouldn't be at all surprised if the company buys even more.
- Last but certainly not least, if bitcoin starts to gain traction as a method of payment, Square could make it a payment option on its POS terminals, opening bitcoin payments to its network of millions of merchants. PayPal (PYPL -1.76%) has already announced plans to do this. It wouldn't be surprising for Square to follow suit.
The rest of Square's business should do well regardless of bitcoin's performance
There's no denying that Square's bitcoin operation has been very successful. It could stand to benefit dramatically if bitcoin's price keeps rising, or if the digital currency achieves widespread merchant acceptance. The point is that Square doesn't need those things to happen.
At its core, Square is still a payment processing business. It has grown dramatically over its decade-long history. More than $100 billion of annualized payment volume now flows through Square's hardware. And with card payments expected to become a $45 trillion global market by 2023, this could be just the beginning.
In addition, Square has built a nice business lending operation in the form of Square Capital, which has originated billions of dollars in small business loans. It does this at a much lower credit risk than its peers, since its loans are based on merchants' sales. Square received approval for a banking charter of its own in 2020, and the company plans to launch its own industrial bank next year.
Finally, there's the Cash App, which offers so much more than bitcoin. The app provides person-to-person payments, the ability to buy and sell stocks, and debit cards. Cash App's user base has quadrupled over the past three years. More than 30 million people actively use the platform, which is still in the relatively early stages of monetization.
In a nutshell, Square's growth story has been impressive so far, but it could still have more room to grow. That's true with or without bitcoin.
The bottom line
In the corporate world, there are few people who believe in the long-term potential of bitcoin more than Square CEO Jack Dorsey. There's no denying that Square's non-crypto business growth is extremely impressive, to say the least. If you believe in the long-term potential of bitcoin as an asset, but don't necessarily want your investment results to be only dependent on bitcoin, Square could be a smart way to go.