Square might have a Bitcoin problem

The easy money days for Square Inc. may be behind it.

On Thursday, the fintech company — known for its merchant checkout system and its digital wallet Cash App that enables person-to-person payments, stock investing and Bitcoin trading — reported lower-than-expected revenue for the quarter ended in September, mainly due to disappointing results from cryptocurrency trading. That business, which allows users to buy and sell Bitcoin through the app, generating fees for Square in the process, had $1.82 billion in sales, up 11% from a year ago but significantly below the $2.47 billion median estimate of analysts surveyed by Bloomberg.

It’s clear Square’s cryptocurrency business is a huge area of uncertainty. Let’s be honest. Bitcoin today is barely used as a currency to spend on things. Instead, it is primarily a vehicle for financial speculation. That’s why it’s a problem that the company’s Bitcoin trading revenue faltered at a moment when the most widely traded cryptocurrency was hovering near its all-time high, having climbed more than fourfold in the past 12 months.

Even with the drop, the company’s Bitcoin revenue still accounted for nearly half Square’s total of $3.84 billion for the third quarter. That figure was up 27% compared with the prior year, and well below the $4.51 billion median estimate. Square shares fell 5% after the report.

While not a significant driver of profits today, there is little doubt Bitcoin trading has played a big role in Cash App’s user growth and engagement for other services. If crypto trading fever continues to ebb, it will significantly dent Square’s bottom line.

Square’s other businesses also face challenges over the next year. The company’s products thrived during the pandemic as easy-to-use internet alternatives to in-person banking and financial services. But many tailwinds such as government stimulus payments and the unemployment benefits that expired in September that drove usage are dissipating.

Then there is the outcome of Chief Executive Officer Jack Dorsey’s $29 billion bet to acquire buy-now, pay-later firm Afterpay Ltd. Square plans to close the deal early next year and integrate the service — which gives consumers the ability to pay for merchandise in four interest-free installments – into its payments app and checkout service for physical stores.The Square-Afterpay combination doesn’t look like an automatic success. First, there is tremendous competition in the sector. Buy-now, pay-later players like Affirm Holdings Inc. – which recently scored a partnership with Amazon.com Inc. – and Klarna are winning deals with merchants. With half of Afterpay’s business concentrated in its home geography of Australia and New Zealand, there is also no guarantee it will become the leader in Western markets. And larger companies such as Apple Inc. and PayPal Holdings are planning to compete in the buy-now, pay-later market and could offer better deals, crimping the industry’s profitability.

Finally, the biggest unknown is what happens when the economy slows down. Square could then face large credit losses if consumers aren’t able to pay off their commitments.With a growing set of risks from less stimulus to cryptocurrency uncertainty and the integration of a massive acquisition, Square’s future seems much more complicated now. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tae Kim is a Bloomberg Opinion columnist covering technology. He previously covered technology for Barron’s, following an earlier career as an equity analyst.

More stories like this are available on bloomberg.com/opinion

©2021 Bloomberg L.P.

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