SQ: SQ and Bitcoin

Investment Analysis Clubs Saul’s Investing Discussions
1

Bitcoin was trading below $1000 at the beginning of 2017. It looks like it’s about to hit $10,000. It could happen today. That’s a 1000% increase in 11 months.

We know that SQ recently started a trial that allows users of its CashApp to buy and sell Bitcoin. This means that they are allow to trade Bitcoin.

http://www.businessinsider.com/square-is-taking-on-the-big-c…

Here’s what this Business Insider article reads:

Square, the online payments company founded by Twitter’s Jack Dorsey, has been running a trial that allows users of its Cash App to buy and sell bitcoin.

And both Wall Street and the crypto world thinks the company stands a good chance at breaking into the nascent digital coin market.

Square added the feature to Cash, a rival to Venmo, because users asked for it, the company said in a statement. It said it is still trying to figure out how to make it “faster and easier” and is only offering it to a “small number” of Cash users. A full roll-out of the feature would put Square up against cryptocurrency exchanges such as Coinbase and Gemini.

The article went on to say this:

Crypto-fanatics took to Twitter over the weekend to praise the new product, adding that it poses a big threat to existing bitcoin trading platforms.

Jack Mallers, one user of the app, said on Twitter he deposited $20 from his debit card into his Cash App and was able to buy bitcoin in 30 seconds. Josh Olszewicz, a bitcoin trader, told Business Insider Square stands to “eat Coinbase’s lunch.”

“The big theme is being friction-less as much as possible,” he said. “With Square, on-boarding [takes] seconds.”

Coinbase has allowed users to buy bitcoin instantly with their debits since August 2016, but they charge 3.99% for the service. Square, on the other hand, hasn’t been charging users in the trial. Of course, it is still early days, with at least one Wall Street firm forecasting fees of 1.5% in the future.

Square’s brand name could also give it a leg up over existing cryptocurrency exchanges, according to Kirsten Morin, senior investment manager of global venture capital at Aberdeen Standard Investments.

So it looks like SQ is for now allowing traders to trade Bitcoin.

I think that SQ is probably adding fuel to the Bitcoin frenzy fire. Since SQ’s announcement, Bitcoin’s price has risen about 25%…in the past week.

Is Bitcoin like tulip’s? Is it a big bubble? Has SQ caused an acceleration in Bitcoin’s price? And has Bitcoin’s increase in price along with SQ’s experiment contributed to SQ recent surge in stock price? How much of SQ’s stock price increase was fueled by Bitcoin and SQ’s experiment to trade it? Probably some.

Now let’s ask a different question. Is Bitcoin going to be increasing useful for buying and selling goods as opposed to just trading the currency? If Bitcoin does become more used for buy goods, then will SQ’s CashApp users benefit (i.e. will CashApp users be more easily able to use Bitcoin to buy stuff?)? Will SQ merchants benefit (i.e. people will buy more stuff from SQ merchants)? And will SQ benefit by attracting more people to use CashApp and become SQ merchants? This last question comes to the crux of why SQ might be experimenting with Bitcoin trading…is this more about Bitcoin acceptance for their merchants? If so, then is this going to be sustainable…will Bitcoin be around and will a significant number of people who hold Bitcoin want to spend it and not just trade it? I think we don’t know the answer…SQ doesn’t know the answer which is why it is an experiment. But if Sq is trying something that its competition is not trying then if it becomes a big deal then SQ will have a leg up and be able to attract more CashApp users and more merchants tot he Square platform.

So what about SQ as an investment. I have a large position in SQ (still 12% of my portfolio after the recent drop). I also own Jan2019 $20 and $30 calls which together amount to 0.3 shares per share than I own (again 12% of my portfolio). I didn’t any sell into the recent price surge and I didn’t buy any after the drop. The reason is that I like SQ long term and I have no idea what the stock is going to do in the short term. It is possible that SQ’s near term stock price movements are more tethered to the price of Bitcoin. Maybe. Maybe not but I think this is more the case now. Bitcoin could go to $20,000 or it could go to $5000. I think if Bitcoin’s surge continues then we will see SQ hit new highs. I have no idea where Bitcoin will go so I don’t want to trade SQ right now. Is Bitcoin a tulip or is SQ helping to legitimize Bitcoin? If Bitcoin becomes a more legitimate currency for buy goods than just a trade then it will be around longer. Even so, I have a hard time believe that Bitcoin’s price surge is sustainable. It will probably see a very large correction in price. When? Nobody really knows. But I will say this: if Bitcoin’s surge continues and SQ’s stock price quickly rises to around $60 then I will probably take the opportunity to trim my SQ position.

Chris

17 Likes
2

So I’m confused by the whole Bitcoin/Square argument.

To be honest, I don’t understand how Square intends to capitalize on allowing Bitcoin to be used as an exchange medium. How is supporting Bitcoins any different than supporting dollars or renminbi or any other currency (I don’t know if Square supports renminbi, just an example).

It might be a convenience for some merchants or the clients of some merchants, but what difference it actually makes directly to Square’s bottom line, if any, just eludes me.

Anyone care to illuminate?

1 Like
3

Anyone care to illuminate?

My take may be wrong but goes like this: Bitcoin is becoming more accepted as a payment medium, but you still can’t wave your smartphone in front of the babysitter and pay her in Bitcoin and say, “There you go.” You can’t buy a turkey at Piggly Wiggly (yet.) But with every added outlet that accepts payment in Bitcoin, the foundation becomes more solid for its future as a relevant and valuable medium of exchange. With Square, they aren’t just gaining an outlet, they’re adding a diverse array of businesses that can accept Bitcoin payment, bringing it that much closer to being accepted “everywhere” to the same extent that Mastercard or Visa are.

Pretty soon we might hear similar things to Mastercard about your Bitcoin encryption key. “Don’t leave home without it.”

Unrelated: I’d guess a lot of entities are running to try to be the first to “manage” crypto currencies regardless of blockchain tech. When you have the fact that losing your encryption key makes your money go < poof! > forever into the ether, financiers can’t handle the idea of them not “holding it for safekeeping” kind of like Swiss banks did after WWII. “No proof of ownership, no cash. Have a good day.” Not to mention the possibility of raking 1-2% off the top of every transaction is rather enticing. If crypto-currencies actually avoid involvement by the banks and the “managers,” it’s no wonder so many are excited about them. Plus, it could stifle governments’ efforts to manage inflation, deflation, stagnation and the common cold. :slight_smile:

Dan

1 Like
4

Brittlerock,

To be honest, I don’t understand how Square intends to capitalize on allowing Bitcoin to be used as an exchange medium. How is supporting Bitcoins any different than supporting dollars or renminbi or any other currency (I don’t know if Square supports renminbi, just an example).

It might be a convenience for some merchants or the clients of some merchants, but what difference it actually makes directly to Square’s bottom line, if any, just eludes me.

SQ has said that this Bitcoin thing is an experiment so I don’t think they are yet intending to capitalize. Users have asked SQ to allow buying and selling of Bitcoin and SQ said "ok, we will allow you to trade Bitcoin on Square Cash. This means that users of Square Cash can buy and sell Bitcoin. But they cannot use it to buy things. Yet.

So what this means for now is that Square Cash gives its users a way to trade Bitcoin. This is a first step. Whether SQ will take the second and third steps is not yet known. However, this first step is not insignificant. Square Cash competes with PayPal’s Venmo and Apple’s Apple Pay. People use these systems to pay each other. My understanding is that Venmo is the most popular and has the largest marketshare. I think that SQ’s recent move to allow trading of Bitcoin costs SQ very little but it will probably increase SQ’s marketshare. There will be people who will sign up for Square Cash solely for the ability to be able to buy and sell (i.e. trade) Bitcoin. How many will do this? Well, Bitcoin’s rise in price has really accelerated in recently days/weeks. I personally think it’s going a bit crazy but this must be because more and more people are feeling like they are missing out by not owning Bitcoin. If someone wants to trade Bitcoin they must use one of the exchanges which costs them a percentage when they trade. I think it’s around 5%. Or they could now use Square Cash, and for now Square is not charging any transaction fee for trading Bitcoin. SQ main benefit currently is getting more people onto Square Cash. I see it as a low cost way to gain marketshare versus PayPal and Apple.

I do believe that SQ’s move also influenced the price of Bitcoin to rise. This is because I think that SQ’s first step with Bitcoin is a big deal in legitimizing Bitcoin as an exchange currency rather than just something to trade and speculate on. In turn, I also think that this move has now tethered Bitcoin’s price to SQ’s stock price. The degree of tethering is unknown but I also think some tethering is justified but most of the tethering is based on false assumptions about both Bitcoin and SQ.

How SQ can help to legitimize Bitcoin as an exchange currency

An exchange currency is a currency that is used to buy and sell goods and services. Today, Bitcoin is primarily just for traders and speculators because Bitcoin is not widely accepted as a currency by the providers of goods and services. To become an exchange currency Bitcoin must be accepted by more providers of goods and services so the holders of Bitcoin can actually spend it. Today you can go to Nordstrom to buy a suit with Bitcoin. There are some vendors that accept Bitcoin but it’s not widely accepted. So if you own some Bitcoin you mostly can only buy and sell the Bitcoin (rather than spending it on stuff).

SQ has taken the first step of allow users of Square Cash to buy and sell Bitcoin. This allows them to have some Bitcoin.

Step 2 will be that SQ allows users of Square Cash to pay each other with Bitcoin. I see this as an option for each user of Square Cash where they must enable the acceptance as there is risk in holding Bitcoin because Bitcoin is not a stable currency. An example, of this would be three friends going out to dinner. One friend pays. The other 2 friends pay the first friend using Square Cash to transfer the money. If the friends are all on Square Cash and they all have Bitcoin acceptance enabled then friends 2 and 3 can pay friend 1 in Bitcoin or in dollars. This is step 2. Step 2, assuming SQ chooses to take this next step, should drive more and more users to Square Cash.

Step 3 will be that Square allows its merchants the ability to accept Bitcoin as a form of payment. I would imagine that this will be an option for each SQ merchant. Now you would have a situation where users of Square Cash can use Bitcoin to not only exchange Bitcoin with their friends but also use the Bitcoin to buy goods and services from SQ merchants. There are thousands of SQ merchants. SQ taking this step would be a big deal because it is an important step to making Bitcoin useful for more than trading and speculating. I think that this move would attract even more people to sign up for and start using Square Cash. I also think this move will drive more merchants to use Square as their payment processing platform.

NOTE: Bitcoin is going nuts right now. Yesterday, Bitcoin crossed $10,000 for the first time ever. Today, just one day later, Bitcoin is at $11,300. Holy moly! This can only be because there is more demand for Bitcoin…more people want to own it. More people are fearing that they will miss out if they don’t own it. Classic bubble. I think SQ is making it easier to own it and trade it which is probably contributing to the rise in Bitcoin price. Bitcoin’s rise in price is probably also influencing SQ’s stock price. I believe that this is an invalid link (i.e. it should not be linked) but I think that it is happening. There should be some small link because the increase in Bitcoin price means that demand is rising and some of that demand i probably coming from people who signed up for Square Cash and are buying Bitcoin that way. I continue to believe that SQ’s stock will be falsely linked to Bitcoin…in the short run. If we see Bitcoin continue its rise then I believe SQ will rise. If Bitcoin’s price crashes then I would think that SQ’s stock price will take a sharp downward turn. I believe these moves in SQ stock would be temporary but might offer us opportunities.

Chris

6 Likes
5

Thanks Chris,
That helps. You’ve more or less confirmed my initial conclusion that allowing the use of an additional currency shouldn’t really make much of a difference. I was unaware that what SQ had done with bitcoin didn’t allow people to buy and sell goods and services with bitcoins. As such, it seems to me to have even less value to Square’s bottom line.

But, as I was ignorant, so too are a lot of folks in the market who incorrectly link the value of Square’s stock directly to the irrational explosion of bitcoin’s exchange rate.

Ain’t investing an interesting game.