Bitcoin has made quite the comeback in 2020. The cryptocurrency recently broke through to all-time highs, finally surpassing its 2017 peak of around $20,000. It currently sports a value of over $23,000 a coin. Square (NYSE:SQ), the fintech company known for point-of-sale (POS) solutions and peer-to-peer (P2P) payments, has made numerous investments and announcements involving bitcoin, possibly leading investors to think the two securities should move in tandem.
However, this sentiment couldn't be further from the truth. Bitcoin does not have a direct effect on Square's business (at least, not yet). Here's why.
What Square is doing
Square has made a few investments into the crypto space. The most well-known was in early 2018, when it started to let Cash App users buy and sell bitcoin. This wasn't revolutionary (plenty of other services let you buy cryptocurrencies), but it was treated as a marketing tool. It is likely a big reason why the consumer-focused personal finance app has quadrupled its user base over the last three years.
Another initiative includes a dedicated team of employees called "Square Crypto" that helps build "open-source projects aimed at making bitcoin the planet's preferred currency." That is a bold mission statement -- but with only six employees at the moment, this likely won't have much of an effect on Square's bottom line anytime soon.
Lastly, the company announced in October that it bought $50 million (at the time) worth of bitcoin, or 4,709 coins. It is tough to decipher why the company chose to do this, but it stated the purchase was made to help "expand" its balance sheet. At a price of $23,500, the bitcoin on Square's balance sheet is worth just over $110 million today. Considering that Square's market cap currently exceeds $100 billion, the gains on its bitcoin holdings are immaterial.
Why it's overhyped
Each quarter, Square tells investors how much revenue it brings in from bitcoin. This number ballooned in the third quarter to $1.6 billion, leading to article headlines talking about Square's 1,000% revenue growth in bitcoin. While these pieces may get a lot of clicks, they are actually quite misleading. Whenever Square buys bitcoin for its users, it is forced to count it as revenue, even though the margin it makes is negligible. In fact, out of the $1.6 billion in bitcoin "revenue" Square brought in last quarter, only $32 million turned into gross profit.
With bitcoin revenue inflating Square's top line (it made up over 50% of sales last quarter), investors shouldn't really be paying attention to it. Instead, they should focus on evaluating what Square can do with bitcoin to drive the use of other products that generate real cash for its business. For example, Square just announced Cash App users could earn bitcoin through the Cash Card's (the app's debit card) cash back feature. The company will again make negligible margins on the bitcoin it gives out, but it will hopefully incentivize users to spend more with its debit card, a product that generates real profits.
Think of these bitcoin features as an efficient 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's price soar, and those price increases may cause Square's share price to move in the short term. However, bitcoin prices currently do not affect the underlying business, which is what will drive the stock over the long term.