Why Bitcoin Investors Should Consider Buying Square Stock

It's no secret that Square (SQ +6.77%) CEO Jack Dorsey is a big believer in Bitcoin (BTC +0.70%). In the most recent earnings call in late February, he noted his conviction that it would be the currency of the internet. To align the company with that notion, Square has aggressively purchased Bitcoin over the last year.

That makes Square an interesting stock. For investors who prefer not buy cryptocurrency directly, Square is a great way to gain Bitcoin exposure. And for investors who own Bitcoin, Square's robust business can help diversify a crypto-heavy portfolio. Here's why.

Bitcoin drives Cash App engagement

Square's Cash App launched as a peer-to-peer (P2P) payments platform in 2013, but it has evolved into a suite of financial tools designed to help consumers manage their money in a variety of ways.

Image source: Getty Images.

Since 2017, Square has added the ability to buy and sell Bitcoin, launched the Square Cash Card, and enabled direct deposit for Cash App consumers. And in November 2020, Square further enhanced the mobile app's financial tools with its acquisition of Credit Karma Tax, a free tax filling service for consumers.

All of these products have one thing in common: They are meant to deepen consumer engagement by expanding Cash App usage beyond peer-to-peer (P2P) payments. And it's working -- these strategic moves have powered strong growth in both Cash App monthly active users and gross profit.

Data source: Square SEC Filings. CAGR = compound annual growth rate.

In particular, investors should note that Cash App gross profit has grown more quickly than monthly active users. That means Square is generating more revenue per user, and Bitcoin has played a big role in making that happen.

In fact, more than 3 million Cash App users bought or sold Bitcoin last year, and consumers who use Cash App to trade Bitcoin also use other products (i.e., Square Cash Card, direct deposit) more frequently than the average consumer. In other words, they are more engaged, and more engaged users generate more profit.

But there's another side to Square's business. While the Cash App ecosystem is a consumer-facing product, the seller ecosystem allows Square to address the merchant side of the digital payments market.

Digitization drives the seller ecosystem

Digital forms of payment have become increasingly popular over the last decade, driven by convenience and the uptick in e-commerce. In fact, according to a report published by Square, the number of cashless businesses more than doubled in Australia, Canada, the United States, and the U.K. in the last 12 months alone. 

That shift away from cash benefits Square in two ways: First, Square provides the hardware and software merchants need to accept in-store digital payments. Second, the company's developer platform makes it easy to add Square-powered checkout options to digital storefronts and mobile apps. In both cases, Square collects transaction fees based on the gross payment volume (GPV).

Not surprisingly, the GPV processed on Square's platform has increased steadily in recent years.

Data source: Square SEC Filings. 

Two big market opportunities

In total, management estimates Square's current market opportunity at $160 billion: That's a $60 billion opportunity for the Cash App ecosystem and a $100 billion opportunity for the seller ecosystem. To put that in perspective, Square generated $9.5 billion in revenue last year -- roughly 6% of its total addressable market. That means Square still has plenty of room to grow.

Moreover, the coexistence of these two businesses -- one built for consumers and the other designed for merchants -- allows Square to tap both sides of the digital payments market. In the coming years, as e-commerce and digital payments continue to gain market share, the company should benefit greatly. That's why Square looks like a smart long-term investment whether you own Bitcoin or not.