In 2009, an individual known only by the pseudonym Satoshi Nakamoto created what has become the world's largest cryptocurrency: Bitcoin (BTC 0.29%). Since that time, Bitcoin prices have skyrocketed and plunged repeatedly in a dizzying display of volatility. But those frenetic price swings are just one of the reasons Bitcoin can be a risky place to invest your money.
If concerns about this digital currency have led you to avoid betting directly on an asset class that has no clear investment thesis (or on a digital currency that's relatively difficult to spend in the real world), both PayPal (PYPL +1.44%) and Square (SQ +16.96%) are companies that now offer some Bitcoin exposure without the same level of risk.
Here's what investors should know.
Image source: Getty Images.
The importance of Bitcoin
In May 2018, Square started allowing Cash App users to buy and sell Bitcoin. PayPal followed suit with its digital wallet in 2020, and it plans to add the feature to Venmo in the summer of 2021. What's more, a report by Pantera Capital indicates that both fintech companies are aggressively buying the digital currency. New Bitcoins are created according to a fixed formula and the amount of new coins created will eventually stop when it reaches 21 million. According to Pantera Capital, Square and PayPal together are buying more than 100% of newly mined Bitcoins currently out there. In other words, they are purchasing every new token created as well as some already in circulation.
During PayPal's recent earnings call, CEO Dan Schulman indicated that users responded with overwhelming enthusiasm to the company's Bitcoin launch. Even more exciting, Schulman reiterated the company's plan to enable Bitcoin as a payment method at any of PayPal's 29 million merchants later this quarter.
While PayPal just started offering this service and has yet to provide specific financial details, Bitcoin has become a major contributor to Square's top line. In fact, Bitcoin sales have risen from $34 million in the first quarter of fiscal 2018 to $1.6 billion in the third quarter of fiscal 2020 -- that's a 4,600% increase in less than three years.
However, Bitcoin revenue comes with incredibly low margins -- in the most recent quarter, Square's gross margin on Bitcoin was just 2%. In other words, despite accounting for the majority of Square's revenue, Bitcoin's contribution to the bottom line is negligible. So what's the point?
For both PayPal and Square, Bitcoin is a way of engaging users. It's one more feature that enhances their mobile app ecosystems. And as these fintech companies add new users, it becomes more likely that those users will engage in other profit-generating activities.
For example, Square's Cash App also allows users to send peer-to-peer transfers, instantly transfer funds to bank accounts, receive direct deposits, buy and sell stocks, and make purchases using the Square Cash Card. And users who adopt two or more of those services transact three to four times more frequently and generate three to four times more gross profit than other users. Additionally, in the third quarter of fiscal 2020, 23% of Cash App consumers were daily users compared to 15% in the third quarter of fiscal 2018. In other words, Square's strategy is working, and PayPal will likely see similar benefits.
The benefits of Square and PayPal
Compared to purchasing Bitcoin outright -- which is a risky investment for a number of reasons -- Square and PayPal both have thriving businesses outside of cryptocurrency.
These fintech companies have developed highly engaging product ecosystems that empower both sellers and consumers. Whether it's the ability to accept digital payments, invest in cryptocurrency, or transfer money to friends or family, both PayPal and Square provide truly valuable services. Moreover, both have built sizable networks protected by strong moats, creating a barrier to entry (something Bitcoin lacks). And that has translated into tangible wealth and significant revenue growth.
|
Metric |
2017 |
TTM |
Change |
|---|---|---|---|
|
PayPal revenue |
$13.1 billion |
$21.5 billion |
64% |
|
Square revenue |
$2.2 billion |
$7.7 billion |
246% |
Data source: PayPal and Square SEC filings. TTM = trailing 12 months.
Finally, digital payments and e-commerce are only becoming more prevalent around the world. And in the years ahead, the tailwinds from those trends should help PayPal and Square continue to create value for all stakeholders, even if Bitcoin's value evaporates.
A final word
No investment is without risk, nor is any asset class guaranteed to gain value over time. But Bitcoin's volatility and questionable long-term utility makes it unusually risky in my opinion, even compared to some of the most volatile stocks.
Alternatively, PayPal and Square allow investors to benefit from the mania surrounding Bitcoin while avoiding actual exposure to the cryptocurrency. Put another way, shareholders of PayPal and Square benefit from the buying and selling of Bitcoin, not the value of a currency prone to wild fluctuations. That's why I'll take these two fintech companies over Bitcoin any day of the week.
