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Square Inc Takes a Ride on the Bitcoin Train

Bret Kenwell

Shares of Square Inc (NYSE:SQ) just won’t cool off. SQ stock price continues to rally even as the market goes through its first mini-correction in quite some time. So what did it do? Management confirmed a pilot program is in place that allows users to buy and sell bitcoin.

As bitcoin goes more mainstream, prices will have the opportunity to continue higher. The fact the CME Group Inc (NASDAQ:CME) will soon have futures contracts on bitcoin will likely attract more institutional investors. With more than half the country not even sure if bitcoin is legal, it has a ways to go. But with the help of Square, that perception could change.

What Does Bitcoin Mean for Square?

So what exactly is Square’s position on the cryptocurrency? The company is running a pilot program with its Square Cash app that will allow select users to buy and sell bitcoin, but not send it.

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That’s interesting, as that’s the main function of the app. In fact, while Venmo, a property of PayPal Holdings Inc (NASDAQ:PYPL), may seem more popular, some reports indicate Square Cash has more downloads, both with Android and Apple Inc. (NASDAQ:AAPL) devices.

Having a trusted, well-known platform could be just what bitcoin needs to further its legitimacy. To no surprise, it’s value appreciated almost 10% on Wednesday, while the SQ stock price gained 2.3% and is up a further 1.1% today at 8 a.m. ET in pre-market trading.

Potential Fee Income

If all goes well, the bitcoin addition will likely be available to all users. I would guess that sending bitcoin to friends will also be an eventual feature, as will making purchases at businesses.

It’s made me wonder a few things, though. How much of a fee will there be for buying and selling bitcoin? I have not been able to find any reports on this front. If it were to charge a fee for buying and selling bitcoin, it could make a fortune.

Also, when/will Square Cash allow users to interact with foreign currencies and different countries? From a fee perspective, SQ could pocket the differences on the exchange rate. I don’t know that SQ will do any of this, but it could be financially rewarding if it did.

Finally, how long before PayPal gets involved? This could be big for Square provided bitcoin continues to gain in popularity and more consumers look to Square as a way to access cryptocurrencies.

Trading SQ Stock Price

chart of SQ stock price


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The SQ stock price is up more than 60% over the past 90 days and almost 200% so far in 2017. I was on the bullish train, but got off way too soon. I tried to get cute and flip my position.

The market was on to my nonsense though and was sure to serve me up a few helping of humble pie. I will certainly regret not riding this horse for longer. Heck, I already do.

 

On the charts, you can see the trend is overwhelmingly impressive and calling a pullback has proven tough. If it were to retreat back to its trendline, it would put SQ stock somewhere in the mid-$30s. Wednesday’s reversal off $42 might set up SQ stock for a pause.

The one pattern I did notice? SQ stock tends to rally to new highs and then pullback/consolidate. Often times, it retests, or gets close to retesting its breakout level. For SQ, that would be near $34. If it gets there, I think many buyers would step up, as would I.

With its recent surge, SQ stock now trades at more than 8 times sales — more richly valued than PYPL. SQ certainly isn’t cheap and an argument can be made for favoring PayPal, given how well it’s doing.

But SQ continues to deliver, as it has upped its full-year outlook in each of its last two quarters. Many can see that SQ is building out a unique ecosystem that could pave the way to a totally different way of doing business. Adding bitcoin only underscores that vision.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.

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