Cryptocurrency is rapidly becoming a recognized asset class for both individual and institutional investors. However, it remains a daunting sector at the intersection of finance and technology. Beyond understanding how digital currencies work, there are thousands of coins and tokens available for trading and investment.
For those new to crypto, there is a straightforward way to start investing while learning how the ecosystem operates: through Square (NYSE: SQ). This stock offers significant long-term potential tied to the enduring promise of cryptocurrency, making it an ideal starting point.
Square's Core Business and Bitcoin Integration
Square is primarily a digital payment and fintech platform. It operates through two main segments: the Seller Ecosystem and Cash App.
The Seller Ecosystem provides point-of-sale and software services to merchants. Cash App is a consumer-focused mobile payment and money transfer platform.
In Q3 2021, the Seller Ecosystem revenue grew 44% to $1.39 billion. Cash App revenue increased 33% to $578 million. Notably, these figures for Cash App exclude revenue generated from user Bitcoin transactions.
Bitcoin as a Revenue Driver
Square is more than just a peripheral bet on the crypto world. Bitcoin-related revenue in Cash App (primarily from facilitating customer transactions) reached $1.82 billion in Q3 2021, an 11% year-over-year increase. This generated $42 million in gross profit, a 29% rise.
While the profit margin on this revenue stream is slim, it supports the company’s broader strategy. To bolster its Bitcoin trading capabilities, Square held $352 million worth of Bitcoin as of September 30, 2021—equivalent to over 8,000 coins.
Thus, by holding Square stock, investors gain indirect exposure to Bitcoin since a meaningful portion of the company’s assets is invested directly in the cryptocurrency.
If you believe Bitcoin will appreciate over time, Square stands to benefit significantly.
Strategic Moves in the Crypto Space
CEO Jack Dorsey, a vocal Bitcoin advocate, has indicated that Square is exploring entry into Bitcoin mining. This would place the fintech firm alongside companies like MicroStrategy (NASDAQ: MSTR) and Riot Blockchain (NASDAQ: RIOT) in the mining sector.
Using Crypto to Enhance Business
Beyond Bitcoin holdings, Square employs cryptocurrency to advance its operational goals. Although Bitcoin transactions contribute minimally to profits, they serve as a powerful user acquisition tool for Cash App.
Once users are engaged, Square can promote other high-margin services within the app, such as linked credit card payments, the Cash App debit card, stock trading, and microloans (e.g., through the pending acquisition of Afterpay).
The company also enables Bitcoin payments for consumers in Cash App and for merchants in the Seller Ecosystem who wish to accept Bitcoin from customers.
Additionally, Square launched a new business unit called TBD last summer. TBD focuses on supporting developers in creating new products and financial tech use cases for Bitcoin, promoting broader adoption among consumers and businesses.
In short, you can buy Bitcoin directly as a passive asset, or you can invest in Square—a company actively using Bitcoin to grow its business and pursuing ambitious plans for the cryptocurrency’s future.
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Frequently Asked Questions
Why is Square considered a good proxy for Bitcoin investment?
Square holds over 8,000 Bitcoin on its balance sheet, meaning its stock value is partially tied to Bitcoin’s price. It also generates revenue from Bitcoin transactions via Cash App, providing indirect exposure without directly owning the cryptocurrency.
What are the risks of investing in Square for Bitcoin exposure?
Square’s stock price is influenced by many factors beyond Bitcoin, such as its core payment business performance, competition, and regulatory changes. Bitcoin’s volatility can also impact the stock, but likely to a lesser extent than direct ownership.
How does Square’s Bitcoin strategy differ from other companies?
Unlike pure-play crypto firms, Square integrates Bitcoin into a broader fintech ecosystem. It uses Bitcoin to attract users and develop new financial products, rather than solely relying on currency appreciation.
Can Square’s move into Bitcoin mining benefit investors?
If Square enters mining, it could create a new revenue stream and further align the company with Bitcoin’s success. However, mining is capital-intensive and competitive, so the impact remains uncertain.
Is Square suitable for long-term crypto exposure?
Yes, for investors seeking indirect crypto exposure through an established company. Square’s diverse business mitigates some risks of direct cryptocurrency investment while providing growth potential tied to digital assets.
How does Cash App’s Bitcoin feature work?
Cash App allows users to buy, sell, and send Bitcoin. Revenue from these transactions comes from fees on trades and spreads on prices, contributing to Square’s overall earnings.