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Why Did Shares of Block Drop 22.5% in December?

By Ryan Downie – Jan 5, 2022 at 6:00AM

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Expect Block shares to move with Bitcoin from now on.

What happened

Shares of Block (SQ -1.94%), formerly Square, dropped 22.5% in December, mostly due to Bitcoin's (BTC -1.85%) falling price. Relatively poor performance of growth stocks and other high-valuation stocks contributed to the losses as well.

SQ Total Return Level Chart

SQ and BTC Total Return Level data by YCharts

So what

Block is a fintech leader that investors are now closely associating with Bitcoin and other cryptocurrencies. The company's Cash App allows users to buy and sell Bitcoin. Block purchased large quantities of Bitcoin to facilitate this. Its accounting treatment of customer Bitcoin transactions also distorts its financial results -- Bitcoin now represents nearly 50% of overall revenue, but only 4% of gross profit.

Excited person holding a coin over their eye, and the coin has a Bitcoin symbol on it.

Image source: Getty Images.

There wasn't much news about Block itself last month. CEO Jack Dorsey announced his resignation from Twitter (TWTR), where he also served as CEO. That unorthodox double duty is over now, leaving Dorsey to devote more time to his passion for Bitcoin. The company also rebranded from Square to Block, an obvious nod to the technology that is expected to drive its future. This follows the company's purchase of Tidal in the first quarter, which seems like one big step toward the NFT market. Those moves all signal a deeper focus on blockchain technology and the fintech disruptions coming along with it.

Now what

Looking at Block's financial statements, it might seem that its operating performance isn't actually so closely tied to Bitcoin. The market certainly seems to be overreacting to short-term volatility in crypto markets.

Still, Block's fortunes will ultimately be tied to crypto and the blockchain for the foreseeable future. The company seems to be making big bets on digital currencies and tokens. That could prove a very shrewd long-term move for an up-and-coming fintech giant, but it's going to create volatility for shareholders in the meantime.

There's still a lot of technological, functional, and regulatory uncertainty around Bitcoin and cryptos. Even if they are completely commonplace in 10 years, we don't know exactly what that world will look like. Sometimes the most influential early movers are supplanted by new arrivals who perfect what others invented. That's unfortunate for the real pioneers of disruption. With all that uncertainty, crypto investors are quick to get squeamish, and the markets are highly speculative.

In the absence of news, expect Block's share price to track Bitcoin. It's going to be a bumpy ride, but it could be a very rewarding one. Don't be caught off guard if there's more volatility.

Ryan Downie owns Block, Inc. The Motley Fool owns and recommends Bitcoin, Block, Inc., and Twitter. The Motley Fool has a disclosure policy.

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