The Daily Dive #093 — Square Earnings And Bank Announcements
Square Focuses On Bitcoin
Square announced their Q3 earnings yesterday with CEO Jack Dorsey highlighting their growing strategic focus on bitcoin when asked about expanding into the buying and selling of other cryptocurrencies,
“No, we’re not. Our focus is on helping bitcoin become the native currency of the internet.” Jack went on to say more about their bitcoin-specific focus,
“We believe this focus is important. We believe it's right. And a lot of it has to do with the resilience, the fundamentals, and the principles that bitcoin offers."
Growing from 5% of their total revenue in 2018 Q1 to nearly 70% at the peak in 2021 Q1, bitcoin revenue has been a key growth focus for the business. Bitcoin revenue accounted for 47% of total revenue in Q3. That said, Square’s bitcoin revenue definition is misleading since they calculate revenue by the total amount of bitcoin sold to their customers. From their latest annual Form 10-K report:
“Bitcoin revenue: Our Cash App customers have the ability to purchase bitcoin, a cryptocurrency. We recognize revenue when customers purchase bitcoin and it is transferred to the customer's account. We purchase bitcoin from private broker dealers or from Cash App customers and apply a small margin before selling it to our customers.”
“Bitcoin costs: Bitcoin cost of revenue is comprised of the amounts we pay to purchase bitcoin, which will fluctuate in line with the price of bitcoin in the market. We purchase bitcoin to facilitate customers’ access to bitcoin.”
Bitcoin revenue is a better indicator to gauge growth in retail customer demand during current bitcoin price market dynamics. After accounting for the costs to acquire the bitcoin, gross profit of the bitcoin business accounted for $42 million in Q3, which is approximately 2% of their $1.815 billion in bitcoin revenue. The gross profit from the bitcoin business accounts for 3.72% of all company gross profit in Q3 of $1.13 billion. On a two-year compound annual growth rate (CAGR) basis, bitcoin revenue and gross profit grew 250% and 343%, respectively
Square highlights the declining trend of bitcoin revenue this quarter as “driven primarily by relative stability in the price of bitcoin, which affected trading activity compared to prior quarters.” Square’s bitcoin revenue is strongly correlated with changes in bitcoin price with revenue peaking in Q1. If this relationship holds, we would expect Square to continue growing their USD bitcoin revenue with increased retail demand and higher prices into Q4.
What will also have a downward impact on the gross profit from this revenue in the future is the fee race to the bottom with competitors like Strike stating they will set out to be the “cheapest and easiest place on the planet to acquire BTC.”
Nevertheless, Square reporting bitcoin revenue this way gives us a direct look into USD retail buying dynamics which saw unprecedented growth in Q1 and Q2 this year. In a recent interview with the Wall Street Journal, Square CFO Amrita Ahuja shared some high level numbers on those buying bitcoin saying,
“We had three million people buying or selling bitcoin through Cash App in 2020. Then in January alone, we had one million people who are new to bitcoin. We think it’s growing in adoption and popularity and understanding and education. And we want to be a part of that ecosystem, learning and growing with it.”
Square’s product offering to buy and sell bitcoin is only the beginning. Their new business, named TBD, will build an open developer platform with the sole goal of making it easy to create non-custodial permissionless and decentralized financial services with a focus on Bitcoin. They plan to share more details in a white paper later this month. They will also be focusing on Bitcoin hardware wallet and Bitcoin mining system initiatives.
Legacy Banks On Bitcoin
Over the last couple of weeks, there have been major key announcements from banks, governments and investors on the latest bitcoin momentum in the legacy financial world. Here are some of the highlights:
