Here’s Why Bitcoin (BTC) Can Take Square (NYSE: SQ) to New Heights in 2021

In 2018, Square NYSE: SQ started allowing people buy Bitcoin (BTC) through the Cash App. But it wasn’t until 2020 where investors realized just how big of an impact Bitcoin could have on the fintech.

In Q2 2020, the Cash App’s $875 million in Bitcoin-related revenue was up 600% yoy. A couple of months later, in October 2020, Square announced that it bought 4,709 bitcoins, which were worth around $50 million at the time. A month after that, Square announced its Q3 earnings; the Cash App’s $1.6 billion of Bitcoin-related revenue was up 1,000% yoy.

It’s easy to discount the impact of Bitcoin on Square. For one, the revenue numbers are very misleading because Square has to record the Bitcoin it buys for its users as revenue. Square’s $875 million in Q2 Bitcoin revenue generated $17 million in gross profit. The $1.6 billion in Q3 was responsible for $32 million in gross profit. For context, the Cash App’s Q3 non-Bitcoin gross profit was $353 million, more than 10x the Bitcoin portion.

Then, there are the 4,709 Bitcoins. Square spent a little over $10,000 per Bitcoin, so it has more than tripled – as of this minute – its Bitcoin investment. Not bad, but that $100+ million in profit is a one-time gain and a drop in the bucket compared to the company’s $100 billion+ market cap.

Though Bitcoin isn’t directly contributing much to the Cash App – and won’t for the foreseeable future – its indirect impact is large.

Bitcoin Gets People Using the Cash App

The Cash App’s gross profit was $385 million in the third quarter, up 212% yoy. How much of that growth could be indirectly attributed to Bitcoin? It’s impossible to come up with an exact number, but it’s likely a good percentage. Bitcoin, after all, surely attracted a large number of people to the Cash App in the first place.

Once people are registered, Bitcoin increases their activity across the app. On the Q3 earnings call, Square’s CFO said, “We saw that customers who adopted two or more products tend to have three to four times more gross profit compared to those who only use peer-to-peer payment, and this adoption allowed customers to find growing daily utility within the Cash App. In the third quarter, daily transacting actives nearly doubled year over year and represented nearly a quarter of the Cash App's monthly transacting actives.”

The statement doesn’t only refer to Bitcoin, but it’s obviously a big piece of the puzzle.

Square is a Play on Bitcoin Interest

The current Bitcoin rally feels a lot different than the 2017 frenzy, when retail investors drove the cryptocurrency too high, too fast. This time around, institutions and big-name investors are getting behind Bitcoin, which gives the move a more sustainable feel. That said, a direct investment in Bitcoin comes with a lot of risk. Some crypto enthusiasts see a day where volatility will decrease, but Bitcoin still frequently drops 20% before you can blink – look at Sunday and Monday of this week. Not to mention, there is the risk of a long crypto bear market, ala 2018 to early 2020.

An investment in Square, however, is a lower-risk play on the price of Bitcoin. If the price continues to surge, then the Cash App could see higher growth. But even if Bitcoin falls off the face of the Earth, the Cash App won’t do the same. Again, it’s impossible to estimate how much of the Cash App’s gross profit is indirectly/directly due to Bitcoin, but it is probably less than 20%.

And all of the Cash App’s $385 million in gross profit is less than half of Square’s $794 million in gross profit.

Bringing it All Together

An investment in Square is a lot more than an investment in Bitcoin. The company’s Seller segment is positioned for a strong 2021. The mobile payment market is expected to grow at a CAGR of nearly 20% over the next five years.

But Bitcoin could boost SQ shares in 2021 because it doesn’t appear that the market fully appreciates the indirect impact that it is having on the Cash App.

SQ looks a bit extended right now – even after yesterday’s drop – but it’s hard to see shares giving up much ground ahead of what could be a blockbuster Q4 earnings report next month. There’s a better chance that shares will keep pushing towards $300.