Square's Earnings & Bitcoin Demand: What the Numbers Say

Square's Q1 2021 Revenue Surges Over 6% Following Strong Earnings Report

Square’s stock price has increased by more than 6% today. This rise follows the American fintech company’s announcement of a substantial $5.06 billion in revenue for its first quarter of 2021.

This figure significantly exceeded expectations, which predicted a revenue of $3.36 billion. The company demonstrated a remarkable 266% growth when compared to its Q1 performance from the previous year.

Understanding the Growth Drivers

Such rapid expansion is typically observed in early-stage startups, not established public companies. Therefore, a closer examination is warranted. A significant portion of Square’s impressive growth can be attributed to its bitcoin revenues and the associated accounting practices.

This aspect of Square’s financial performance requires further discussion.

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Beyond its bitcoin-related earnings, Square exhibited robust performance across other areas. However, its income from bitcoin highlights both the increasing consumer interest in the cryptocurrency and a noteworthy perspective on the long-term fee structure of Coinbase.

Implications for the Cryptocurrency Exchange Landscape

Considering the substantial growth in bitcoin investment activity witnessed by Robinhood, it’s evident that American consumers are not necessarily constrained by traditional arguments concerning cryptocurrency ownership.

The rate at which entities other than Coinbase are gaining trading volume suggests potentially increased competition for the publicly traded crypto exchange than some stakeholders initially projected.

Analyzing Consumer Behavior and On-Ramps to Bitcoin

Today’s focus is on Square’s earnings and its bitcoin foundation, particularly in relation to the results of other companies offering bitcoin sales. The central question is whether consumers will adhere to established expectations or if alternative, less crypto-centric entry points to bitcoin and other cryptocurrencies will gain greater popularity than many enthusiasts predict.

Ultimately, understanding these trends is crucial for assessing the future of the cryptocurrency market.

Bitcoin's Surge in Popularity

Excluding bitcoin revenue, Square reported $1.55 billion in revenue for the quarter, representing a substantial 44% increase year-over-year. This performance is noteworthy.

However, the growth in bitcoin-related revenue significantly outpaced other areas. Square’s report detailed an increase from $306.1 million in Q1 2020 to $3.51 billion in Q1 2021, signifying “significant year-over-year growth” – approximately eleven times greater.

Profit Margins and Revenue Quality

Despite the impressive revenue figures, the quality of this revenue differed considerably from other Square revenue streams. In fact, Square’s bitcoin gross profit rose from approximately $7 million in Q1 2020 to $75 million in Q1 2021, representing around 2% of its total cryptocurrency revenues.

These margins are comparatively low. Nevertheless, the $75 million in bitcoin gross profit was a material contribution to Square’s overall gross profit of $964 million for the quarter, largely due to the company’s scale.

Understanding Square’s Bitcoin Revenue Calculation

Square calculates its bitcoin revenue primarily through bitcoin sales. This explains the relatively low margin on gross bitcoin volume.

It also highlights the considerable demand from Square users to purchase bitcoin during the first few months of 2021.

Similar Trends at Robinhood

Robinhood also experienced similar gains in bitcoin volume, announcing in late February that it had acquired “six million new customers on Robinhood Crypto.” This represents a significant increase compared to its 2020 average of 200,000.

The Importance of Key Ownership

Despite these gains, some argue that these companies are not positioned to thrive in the cryptocurrency space due to their approach to key ownership. Coinbase’s Wallet app allows users to maintain control of their private keys, while Coinbase.com manages keys on behalf of users.

However, Square, Robinhood, and Coinbase have all successfully attracted substantial retail demand. This suggests that the concept of owning one’s bitcoin keys may not be a primary concern for the average buyer, a demographic crucial for the long-term price stability of the cryptocurrency.

Demand for Exposure vs. Technical Capabilities

If key management isn’t a priority, what are Square and Robinhood bitcoin buyers seeking? Primarily, they desire exposure to the bitcoin asset and, more broadly, to cryptocurrencies. This dynamic positions Square, Robinhood, and Coinbase in a competitive landscape.

If the majority of users are simply seeking price appreciation – a characteristic shared by many bitcoin owners who identify as “hodlrs” and anticipate future gains – they may not prioritize the advanced crypto-specific technology developed by Coinbase and other platforms like Binance.

Potential for a Fee War

This could lead to a fee war between Coinbase, Robinhood, and Square, particularly within the domestic market.

This discussion arose following a conversation with a venture backer of Coinbase during its direct listing. The backer asserted that Coinbase’s superior technology would allow it to maintain attractive trading fees.

Coinbase’s Fee Structure

Coinbase currently charges a 0.5% spread on buy and sell transactions, along with fees ranging from $1 for purchases under $10 to $2.99 for purchases between $50 and $200. Additional fees, such as a 25% cut of staking rewards, also apply.

The sustainability of these prices is now being questioned. The substantial influx of funds into Robinhood and Square’s bitcoin offerings raises concerns about their long-term viability.

The “Robinhood Effect” and Competitive Pressures

With Robinhood offering commission-free crypto purchases, the “Robinhood effect” could potentially impact Coinbase and Square’s ability to maintain their current fee structures. Consumers’ preference for utilizing existing platforms with available capital further complicates the situation for Coinbase.

However, both Coinbase and Square delivered strong results in Q1 2021. Therefore, Square’s success in Q1 doesn’t necessarily preclude Coinbase from achieving similar results in Q2.

Diversified Demand and Future Fee Structures

What is evident is that consumer demand appears more broadly distributed than previously anticipated. Higher-fee providers may need to adjust their rates over time, particularly if a significant portion of users are content with lower-priced or free services.