Shares of Square are up more than 6% today after the American fintech company reported a staggering $5.06 billion in revenue in its Q1 2021 earnings report, far ahead of an expected tally of $3.36 billion.
By posting the huge revenue beat, Square grew 266% compared to its year-ago Q1. Because that’s the sort of growth that we generally expect to see from early-stage startups instead of maturing public companies, some exploration is in order. In short, bitcoin revenues from Square, and how they fit into its accounting, are responsible for much of its outsized growth.
And that’s something we need to talk about.
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Square’s performance apart from its bitcoin-driven results were strong. But its bitcoin incomes underscore not only rising consumer sentiment concerning bitcoin, but also an interesting angle on the question of Coinbase and its long-term fee structure.
Mix in the huge growth in bitcoin investment activity that Robinhood has seen and we can easily understand that, at least in the American market, consumers are not beholden to traditional cryptocurrency arguments regarding coin ownership. And the pace at which non-Coinbase entities are accreting trading volume could point to more competition at the now-public crypto exchange than some fans, backers and believers anticipated.
So today, we’re talking Square earnings and its bitcoin base, especially in how it relates to the results of other entities that offer bitcoin sales. Our broader question is whether consumers are going to behave as many expect, or if the less crypto-focused on-ramps to bitcoin and its brethren will prove more popular than many crypto-enthusiasts anticipate.
A bitcoin boom
If we remove the bitcoin top line from Square’s quarter, the company posted $1.55 billion in revenue, a figure that was up 44% compared to its year-ago period. That’s impressive.
But the company’s bitcoin-related revenue growth was far more so. From $306.1 million in Q1 2020 bitcoin revenue to $3.51 billion in Q1 2021, Square wrote in its report that it saw “significant growth in bitcoin revenue year over year,” up “approximately 11x.”
However, that revenue was not as high quality as other Square top lines. Not even close. Indeed, from around $7 million in Q1 2020 bitcoin gross profit, Square managed just $75 million in Q1 2021 bitcoin gross profit, or around 2% of its aggregate revenues from the cryptocurrency. That’s grocery-store-level margins.
But Square doesn’t have to generate huge gross margins for the gross profit it earns from bitcoin sales to matter. The company’s total gross profit in its most recent quarter was $964 million. So, the $75 million in bitcoin gross profit from the same period was material. Thanks to scale, we hasten to add. And that’s the crux of why the Square quarter is so interesting.
The firm calculates bitcoin revenue in the following manner:
Bitcoin revenue is the total sale amount of bitcoin to customers. Bitcoin costs are the total amount of bitcoin that we purchase. We purchase bitcoin to facilitate customers’ access to bitcoin.
So, what we’re looking at with Square bitcoin revenues is really just bitcoin sales. That’s fine, and explains why the company’s resulting margin on gross bitcoin volume was so low.
It also underscores how many Square users wanted to buy bitcoin in the opening months of 2021.
Robinhood reported similar gains to its bitcoin volume, noting in late February that it had seen “six million new customers on Robinhood Crypto,” an enormous gain on its 2020 average of 200,000.
And yet both these companies are not supposed to be doing that well in the crypto world. Why? Because they fail the test of owning one’s keys. Coinbase’s Wallet app, in contrast, allows users to store private keys to their cryptocurrency. Coinbase.com, the main service, as CoinTelegraph reported when the Wallet feature rolled out, stores keys itself.
And yet Square, Robinhood and Coinbase were each able to attract boatloads of retail demand. The idea, then, of bitcoin key ownership as critical to attracting demand doesn’t resonate much with the average bitcoin buyer, a constituency that could be key for long-term price appreciation of the blockchain’s coin.
If key management doesn’t matter, then what do the Square and Robinhood bitcoin buyers really want? Exposure to the bitcoin asset, and, I presume, cryptocurrencies more broadly. This is where Square and Robinhood and Coinbase wind up in something of a duel. If most users just want exposure to price appreciation — NB, this is true of all bitcoin owners, whose self-appointed moniker of “hodlrs,” or long-term holders, implies that they are not in any mood to sell due to anticipated future monetary gains — they may not care too much about the more notable crypto-specific tech that Coinbase, and others like Binance, have built. Which means that Coinbase could find itself in something of a fee war with Robinhood and Square, at least in the domestic market.
I raise all of this because when Coinbase’s direct listing happened, I wound up on Zoom with one of its venture backers. He argued that Coinbase would have a long-term ability to charge fees for trading, at prices it finds attractive, because it offers lots in the way of crypto-specific capability that its rivals lacked. Features, he argued, were worth the price.
But maybe not? Or not for lots of folks, at least. Coinbase charges a spread of 0.5% in buy and sell transactions relating to cryptocurrency trades, and a fee that ranges from $1 for buys of less than $10 or less up to $2.99 for purchases of $50 to $200. Users pay that fee, or a flat 1.5% or more, country depending. And if you stake your crypto using Coinbase, the company will take a 25% cut of the returns.
Are those sustainable prices? I had leaned toward the Coinbase backer’s argument. But now, seeing how much money the crypto hoi polloi are firing into Robinhood and Square’s bitcoin buckets, I wonder. (Square charges around 1.75% for bitcoin buying and selling, per reports; its own pricing page is vague.)
But with Robinhood offering free crypto purchases, you have to wonder if the vaunted “Robinhood effect” could ding Coinbase and Square’s ability to charge fees. And with consumers willing to buy bitcoin where they already have capital, Coinbase could have a more uphill journey ahead of it than its more fervent believers might anticipate.
Still, Coinbase had a bonkers-good Q1 2021. As Square did. So we shouldn’t say that because Square did well in Q1 Coinbase won’t do well in Q2; that would be silly.
What we can know, however, is that unsophisticated consumer demand appears to be more diversely spread than some expected, and higher-fee providers may have to bow to lower fee rates over time, provided that many folks on the bitcoin on-ramp are happy to use lower-price or free services to buy bitcoin and its brethren.
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