Back in April, I highlighted Coinbase (COIN 1.09%) and Square (SQ -0.28%) as two potential ways to invest in the cryptocurrency market. Coinbase operates the largest cryptocurrency exchange in the U.S., and Square's Cash App lets its users easily buy and sell Bitcoin (BTC 1.76%).

At the time, I claimed that Square's more diversified business made it a better investment than Coinbase. But since I made that call, Square's stock has declined about 8% as Coinbase's stock rallied nearly 18%. Let's take a fresh look at both fintech stocks and see if my earlier thesis still makes sense.

Why did Coinbase outperform Square?

Coinbase generates nearly all of its revenue from cryptocurrency trades. As a result, it benefits more from the rising prices of cryptocurrencies than Square, which generated 59% of its revenue from Bitcoin trades in the first nine months of 2021. The remaining 41% of its revenue came from its digital payment fees, seller services, and hardware sales.

Physical Bitcoin tokens on a reflective circuit board.

Image source: Getty Images.

Over the past six months, Bitcoin's price has risen more than 30% and Ethereum's (ETH 1.68%) price has increased nearly 25% -- even as China's cryptocurrency crackdown rattled the cryptocurrency market. Those gains likely drew more users and investors to Coinbase than Square, which is still relying heavily on a post-pandemic recovery for its seller-facing services.

Coinbase is also growing like a weed (for now)

Coinbase's revenue surged 144% to $1.28 billion in 2020, then skyrocketed 671% year over year to $5.34 billion in the first nine months of 2021. It generated a net profit of $322 million in 2020, then stayed in the black with a massive net profit of $2.78 billion in the first nine months of 2021.

Its trading volume rose 142% to $193 billion in 2020 but accelerated to $1.12 trillion in the first nine months of 2021. It ended 2020 with 2.8 million monthly transacting users (MTUs), but that figure hit 7.4 million in the third quarter of 2021. However, its trading volume and MTUs actually declined sequentially in the third quarter as it faced "softer crypto market conditions" -- which "improved meaningfully" later in the quarter and in the early fourth quarter.

Analysts expect Coinbase's revenue and earnings to increase 458% and 355%, respectively, this year. Those are jaw-dropping growth rates for a stock that trades at less than 50 times forward earnings and 13 times this year's sales, but two looming challenges are depressing its valuations.

First, the SEC recently forced Coinbase to cancel Lend, a planned feature which would have allowed its users to lend out their USD Coins (a stablecoin tethered to the U.S. dollar) for interest. That scrutiny indicates Coinbase's other features could also be targeted by regulators in the future.

Second, Coinbase recently disclosed that it suffered a data breach, which resulted in the theft of funds from at least 6,000 customers, between March and May. That revelation could prevent new users from signing up.

Coinbase's growth could decelerate significantly next year. However, investors shouldn't put too much faith in analysts' longer-term forecasts because they're pinned to the notoriously unpredictable cryptocurrency market.

Square's core growth engines are firing on all cylinders

Square's revenue soared 101% to $9.5 billion in 2020, as the Cash App's surging Bitcoin sales offset the pandemic's impact on its payment and seller services. However, its net income declined 43% to $213 million -- due to a higher mix of lower-margin Bitcoin trades, and it would actually have posted a net loss of $82 million for the year without its investment-related gains.

In the first nine months of 2021, Square's revenue jumped 114% year over year to $13.6 billion as its seller-oriented services and hardware sales recovered. Its Bitcoin sales also rose 186% to $8.05 billion, while its total gross payment volume (GPV) jumped 51% to $121.4 billion.

In September, Square revealed that its Cash App -- which generated 72% of its total revenues in the first nine months of 2021 -- served more than 70 million annual active transacting customers. It also agreed to buy Afterpay, an Australian provider of buy now, pay later (BNPL) services, and plans to integrate its tools into its seller and Cash ecosystems.

For the full year, analysts expect Square's revenue and earnings to increase 86% and 104%, respectively. Analysts also expect Square's growth to decelerate next year, but the magnitude of that slowdown -- if it occurs -- will also be pinned to Bitcoin's unpredictable prices.

But based on Wall Street's expectations, Square's stock trades at just over 100 times forward earnings and six times this year's sales -- which makes it seem a bit pricier (relative to its own growth) than Coinbase. 

I'm still sticking with Square

Coinbase is still a promising stock for investors who want exposure to the cryptocurrency market, but it's far too volatile for my tastes. If I wanted to go "all in" on cryptocurrencies, I'd simply buy Bitcoin and Ethereum on Coinbase instead of actually investing in the company.

Meanwhile, Square operates a better diversified fintech ecosystem, which provides digital payments, cryptocurrency trades, free stock trades, and other financial services. Its growth is also volatile, but I believe it will still outperform Coinbase over the long term as it evolves into a next-gen online bank.