Cryptocurrencies have become one of the hottest asset classes on the market over the past year on the rise of everything from Bitcoin (BTC -0.18%) and Ethereum (ETH -0.61%) to Dogecoin (DOGE -1.33%). But there remains debate about the value and durability of cryptocurrencies and crypto stocks long term.
There are lots of reasons investors are buying cryptocurrencies today. Some people think they're a store of value; others think they're the future of digital transactions. And bears think cryptocurrency has no utility or value at all. Whatever the future of cryptocurrency, one company that's built to win and grow from it is Square (SQ -1.78%).
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Why Square wins if crypto is the future
The bullish case for cryptocurrency is that it becomes a commonly held asset class. Whether people are using it as a store of value, transaction currency, or simply for trading, Square will be a winner. The company's current role as a Bitcoin exchange market and custodial wallet allows it to generate significant profit from the spread on transactions. In the first quarter alone, Bitcoin transactions accounted for $3.51 billion in Square's revenue and $75 million in gross profit.
If Bitcoin, or any other cryptocurrency, does end up being a digital currency used for real-life transactions, Square could be set up to be the transaction platform of choice. People could pay for goods with crypto from the Cash App, and customers using Square's selling platform could accept crypto, potentially with lower transaction costs than using credit cards today. And Square could have dozens of cryptocurrency options on its platform for buyers and sellers.
Crypto or not, I think the biggest upside for Square is that it upends the current financial-transaction infrastructure by replacing the banks and credit card companies that sit between buyers and sellers in the marketplace today. And if Square uses crypto to do that, it could be good for crypto and Square.
Square wins if crypto has no future
If crypto is a fad or doesn't end up having any utility in our financial system, Square could still come out a winner. As big as Bitcoin seems for Square, it generated just $75 million in gross profit in the first quarter of 2021 compared to $964 million of gross profit for the company overall. Losing Bitcoin entirely wouldn't be the end of the world.
At the same time, Bitcoin has helped bring millions of people into Square's Cash App platform, which is key to its two-sided financial platform. In March, Square said that 7 million Cash Cards were activated through the Cash App, and that's helping drive record cash inflows and profits for the app.
On the consumer side, Square is trying to build the Cash App into the center of our financial lives. It can be used for deposits, transfers, stock investments, and Bitcoin. Even if Bitcoin goes away, Square is adding tens of millions of users to its Cash App who could eventually be banking or investment customers. And even if Bitcoin shrinks in importance, it has been key in attracting these customers to the platform.
The best way to play crypto today
We saw over the past week that cryptocurrencies can go into a nosedive with little more than a tweet or two from powerful backers. And that should make any investor nervous about the future of crypto overall or any specific cryptocurrency.
Whether you think the future is bright or bleak for cryptocurrencies, I think we have seen this year that Square is going to be able to benefit from this new asset class. Maybe crypto helps the company upend the financial system or maybe it just brings millions of people onto the Cash App. Either way, I think Square comes out of this crypto boom as a winner, and that's why it's the only way I'm betting on crypto today.
