Driven by the growing popularity of its consumer-facing Cash App, Square's (SQ -0.14%) share price has climbed nearly 600% from a low point hit in March 2020 during the worst of the coronavirus pandemic. In the third quarter, the digital payments company shattered revenue estimates as Bitcoin (BTC -2.56%) trading drove widespread growth in the use of other Cash App features.

As Square gears up to deliver its fourth-quarter report on Tuesday, Feb. 23, this fintech darling looks poised to surprise Wall Street again.  

A graphic of a Bitcoin

Image source: Getty Images.

What Bitcoin trading really means for Square

As many Square shareholders are now aware, Cash App includes a Bitcoin trading function. Despite the fact that this feature wasn't launched until late 2017, Bitcoin trading already accounts for more than half of the company's overall revenue. However, as a metric, its "Bitcoin revenue" is quite misleading. Since the Cash App serves as the counter-party for each Bitcoin transaction, Square is required to report the trading volume as revenue. However, the company only books about 2% of each transaction as gross profit. 

CEO Jack Dorsey has long been an advocate for the cryptocurrency, and even went as far as to add $50 million in Bitcoin to Square's balance sheet in October. Since that purchase, the price of Bitcoin is up 340% and euphoria seems to be back. According to Google Trends data, interest in the term "Bitcoin" has surged since September and the cryptocurrency's steep climb demonstrates just how much demand has outpaced supply.

With that in mind, shareholders can probably assume that the company's Bitcoin trading volume is well above its prior levels. For Cash App, that means greater profits. 

Bitcoin is an acquisition tool

Independently, Bitcoin doesn't generate much profit for Square. But as trading volume increases, gross profit tends to follow suit. In 2020's third quarter, Bitcoin revenue grew 1,000% year over year and Cash App's gross profit increased 212% as well. 

The Cash App is attempting to become a one-stop-shop for all things finance. It was launched as a peer-to-peer payments competitor to Paypal's (PYPL 0.38%) Venmo, but since then, Square has steadily added new functions to it. Today, Cash App users can accept paychecks, invest in stocks, buy discounted goods with the cash card, and move money to and from other bank accounts, among other things. 

Most of these other features generate substantially higher profit margins for Square. If its Bitcoin-related functions attract new customers to the Cash App, then Square will more than likely reap the benefits as those users gradually adopt its higher-margin services. 

One concern for Square investors

Square is a multifaceted company that makes it easy for businesses and individuals to access the financial tools they need. However, the narrative around it lately has been focused on Bitcoin, which directly contributes very little to its financials. If the cryptocurrency falls out of favor -- and it has done so before -- the results could make Square's comparable numbers look pretty bad, which could, in turn, lead to short-term volatility in the stock price.

For long-term shareholders, the hype around Bitcoin should be seen as noise. The number to focus on with this company is gross profit. As long as that continues to rise, overall profitability should follow and increase over time.