Why Square’s embrace of bitcoin was 'brilliant'

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In November 2017, Square began a test pilot that allowed some users of its peer-to-peer wallet Cash App to buy, sell, and hold bitcoin inside the app. The stock popped 16% in the week after the news of the test pilot broke; crypto flag-wavers cheered.

By January 2018, Square rolled out the feature to all Cash App users. On Square’s Q4 2017 earnings call in February, then-CFO Sarah Friar explained how Square monetizes its bitcoin feature. Rather than charging a flat fee per bitcoin transaction, “We include a cushion or a margin in the price effectively to allow us to account for the fairly dynamic market that we see for bitcoin.” Square calls it a “spread.”

In its second-quarter earnings report, the company disclosed how much it made in bitcoin profit: exactly $420,000. In Q3, Square’s bitcoin profit was $555,000. That’s $975,000 in 2018 so far from bitcoin.

For a company projecting $3.2 billion in revenue for 2018 that figure is tiny, negligible. And Square got into bitcoin just at the wrong time: amidst a plummeting bear market. Bitcoin has lost 77% of its value in 2018.

So, was bitcoin a bad look for Square?

Far from it. Analysts who cover Square rave about its bitcoin play. “It was a brilliant customer acquisition strategy,” says KeyBanc Capital Markets analyst Josh Beck.

[Square is Yahoo Finance’s 2018 Company of the Year; read all about why.]

The consensus among analysts is that the benefit of bitcoin to Square’s bottom line wasn’t the point. It was a marketing move to raise awareness of Cash App, and it worked.

Twitter CEO Jack Dorsey testifies before the Senate Intelligence Committee hearing on 'Foreign Influence Operations and Their Use of Social Media Platforms' on Capitol Hill, Wednesday, Sept. 5, 2018, in Washington. (AP Photo/Jose Luis Magana)
Twitter CEO Jack Dorsey testifies before the Senate Intelligence Committee hearing on 'Foreign Influence Operations and Their Use of Social Media Platforms' on Capitol Hill, Wednesday, Sept. 5, 2018, in Washington. (AP Photo/Jose Luis Magana)

Nomura Instinet analyst Dan Dolev, using data from mobile app research firm Sensor Tower, found that all-time cumulative downloads of Cash App surpassed Venmo downloads for the first time in July—six months after Square added bitcoin to the app. Dolev estimates Cash App is at 39.9 million total downloads, compared to 37.1 million for Venmo. (Total downloads is not the same as monthly active users: Square hasn’t given that number since December 2017, when it said 7 million; eMarketer now estimates Cash App has 10 million monthly active users and Venmo has 23 million.)

Beck credits much of Cash App’s surge this year to the bitcoin feature, calling it “incredibly savvy,” and believes there was a viral effect from crypto enthusiasts referring their friends to Cash App. Beck even compares it to Square’s infamous cancelled deal with Starbucks a few years ago.

In 2012, Starbucks announced a glitzy mobile payments partnership with Square and invested $25 million in the company. (Starbucks posted a photo of Howard Schultz and Jack Dorsey shaking hands and beaming.) But in 2013 and 2014, Starbucks transactions cost Square more than it made. By 2015, Starbucks let Square out of the deal one year early, for a kill fee of $55 million. CNNMoney called the deal a “giant money loser.” Business Insider called it a “bust.”

But Beck says aligning with Starbucks had the same benefit the bitcoin function did: raising brand awareness. “Everyone viewed the Starbucks deal as a poor deal, they questioned why Square did it. The reason was they got a ton of media impressions, it significantly enhanced their brand awareness, and they probably got some new customers.”

Brian Grassadonia, Square’s Cash App lead and the company’s first product manager, is a little more cagey. When asked about the media attention that adding bitcoin garnered, he says, “That’s certainly not why we did it. It comes back to democratizing access to financial tools that have historically been really complicated, intimidating, and stressful. I think there’s an analogy with card acceptance. Before Square came along, 50% of small businesses that tried to accept credit cards got denied by their banks.”

And yet for Grassadonia, this wasn’t just about adding another financial tool. Grassadonia is an obvious bitcoin believer. His own Cash Card, a physical Visa debit card Square now offers through Cash App, is engraved with the bitcoin symbol, a personal customization he chose. “We think that the prospects for bitcoin as a global currency are really interesting, and there’s super potential there,” he says. “The exact way that manifests, and how that manifests, we’re still early in the life cycle of this. But what we do know is that there is demand from people.”

Dorsey, too, is a bitcoin believer. At CoinDesk’s annual Consensus conference in May 2018, Dorsey said on stage, “The internet deserves a native currency… I hope it will be bitcoin. I’m a huge fan.”

It’s unclear whether everyone else at Square feels the same.

“I think there’s a little bit of a tug-of-war on that internally there, but that’s just my perception,” Dolev says. “Jack is a really big bitcoin advocate. But I think he sees bitcoin as something in line with his overall vision of empowering people in Brazil, Argentina. The company doesn’t want this to be too big of a deal, because then when bitcoin goes down, Square also gets hurt.”

For now, bitcoin isn’t a big deal for Square—financially. But the swift addition of the feature was an impressive signal, says Wolfe Research analyst Darrin Peller, that the company “is innovative enough to be very quick and try new things with commerce. Whenever they see any glimmer of change, they adjust to cater to it faster than most companies I’ve covered.”

If Dorsey and Grassadonia get their way, look for Square to go bigger on bitcoin in the near future.

Daniel Roberts covers bitcoin and blockchain at Yahoo Finance. Follow him on Twitter at @readDanwrite.

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