Square could have a problem with Bitcoin

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

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

It is clear that Square’s cryptocurrency activity is a huge area of ​​uncertainty. Let’s be honest. Today, bitcoin is hardly used as a spending currency. Instead, it is primarily a vehicle for financial speculation. That’s why it’s a problem that the company’s Bitcoin trading earnings have faltered at a time when the most traded cryptocurrency was near its all-time high, having more than quadrupled in the past 12 months.

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

While not a major driver of profits today, there is no doubt that Bitcoin trading has played a significant role in the growth of Cash App users and engagement for other services. If the crypto trading fever continues to subside, it will significantly affect Square’s results.

Square’s other businesses will also face challenges over the next year. The company’s products flourished during the pandemic as easy-to-use Internet alternatives to in-person banking and financial services. But many favorable winds such as government stimulus payments and unemployment benefits that expired in September that resulted in use are dissipating.

Then there is the result of President and CEO Jack Dorsey’s $ 29 billion bet to acquire Afterpay Ltd. in four interest-free installments – in its payment application and payment service for physical stores. The Square-Afterpay combination does not appear to be an automatic success. First, there is huge competition in the industry. Buy now, pay later, like Affirm Holdings Inc. – which recently partnered with Amazon.com Inc. – and Klarna are winning deals with merchants. With half of Afterpay’s business concentrated in its home geography in Australia and New Zealand, there is no guarantee that it will become the leader in Western markets either. And larger companies such as Apple Inc. and PayPal Holdings are considering competing in the buy-now and pay-late market and may come up with better deals, reducing the profitability of the industry.

Finally, the biggest unknown is what happens when the economy slows down. Square could then face significant credit losses if consumers are unable to pay their commitments. With a growing set of risks ranging from less stimulus to cryptocurrency uncertainty and the incorporation of a massive acquisition, Square’s future now looks a lot more complicated.

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

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

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

© 2021 Bloomberg LP

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