One of my favorite stocks is Field. (NYSE: SQ) In the future, I think Square is going to be a great bank. Not surprisingly, when I tried to name the 10 biggest stocks of 2035, Square made my list. I think Square CEO Jack Dorsey is a genius.
While I am a happy contributor, I have never followed Dorsey Bitcoin (CRYPTO: BTC). In fact, for years I have avoided all cryptocurrencies as being too risky. And I watched on the sidelines as Bitcoin went up and up.
Finally, last week I started making my first cryptocurrency purchases. And now I’m just shaking my head at how Dorsey understood the importance of this asset class years ago. In fact, Square is now essentially married to Bitcoin, through thick and thin. These three charts will show what I’m talking about.
January 2018: Square Opens Cash App on Bitcoin
As you probably know, Bitcoin is the number one and number one dog among cryptocurrencies. Bitcoin was created when a person or group, using the fictitious name Satoshi Nakamoto, wrote a white paper in 2008 on the use of peer-to-peer networks to create electronic currency without government or central bank involvement. This was a revolutionary idea, and it caught fire among the tech-savvy people of Silicon Valley.
A decade after the white paper, Square opened its mobile payment service, the Cash App, to allow users to buy and sell Bitcoin. In the past 10 years, a lot of risk-taking investors had already jumped in and bought the new asset on sites like Coinbase Global (NASDAQ: currency). Waiting for a decade to become a cryptocurrency broker has been very cautious. What happened once Square facilitated Bitcoin trading is remarkable.
Square’s stock nearly tripled in nine months. Meanwhile, bitcoin investors are getting fat. Newbies who bought cryptocurrency using Square’s Cash app saw the value of their investment drop by nearly 50%.
So, Dorsey converted Cash app users to Bitcoin at the worst possible time, right? Well, not exactly. Only if you have a short term time horizon.
October 2020: Square Buys $50 Million in Bitcoin
Yes, Bitcoin was a poor investment in 2018, 2019 and most of 2020. But in October of last year, Square said it had bought $50 million worth of Bitcoin for itself.
After the stock market underperformed for nearly three consecutive years, the price of Bitcoin suddenly rose.
Financially speaking, for a company with a market capitalization of $108 billion, $50 million is practically nothing. However, Square’s action validated the coin as a legitimate investment tool.
After a few weeks, PayPal Collectibles (NASDAQ: PYPL) It said that it will soon allow its users to buy and sell Bitcoin on its Venmo app. This only solidified the deal. The coin rallied in late 2020 and early 2021. That’s when Square made another announcement.
February 2021: Square buys $170 million in Bitcoin
At the beginning of 2021, Square significantly raised its stake, buying an additional $170 million in Bitcoin. This is $220 million invested in Bitcoin. This is a great investment for you and me. But it’s still well under 1% of Square’s market capitalization and it’s just 5% of Square’s $5 billion in cash on hand.
Why is Square making this investment? Well, part of the reason is that Dorsey is a huge Bitcoin bull. He believes that one day the world will unite behind a single internet currency. He believes that bitcoin will be that currency.
Another reason is that all coins that are traded on the Cash app are counted as revenue squared. This is not the bitcoin owned by Square. This is the Bitcoin held by Square to facilitate Bitcoin trading on the Cash app. It’s an accounting oddity that requires Square to report all of that Bitcoin trade as revenue. So when Bitcoin is heavily traded on the Cash app, Square’s revenue goes up along with it.
Square is actually married to Bitcoin now. Even the planners go along. Let’s compare Square, Bitcoin and Standard & Poor’s 500 From the beginning of 2018 – when Square first opened the Cash app for trading Bitcoin – to the present.
Square and Bitcoin have both killed the S&P 500 index over the past four years. And I think we’ll see these two charts align more and more. If you are an investor in Square, you should consider Bitcoin and cryptocurrencies as an investment idea. And if you dismiss crypto as reckless or dangerous, perhaps you should rethink your investment in Square.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of the Motley Fool Premium Consulting Service. We are diverse! Asking about an investment thesis — even if it’s our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.