Leading cryptocurrency Bitcoin (CRYPTO: BTC) finally touching a difficult period. You’re here (NASDAQ: TSLA) CEO Elon Musk has backtracked from allowing customers to use digital currency to purchase vehicles, and Chinese regulators have embarked on crypto trading and limited its use as a form of payment. As of this writing, Bitcoin is down almost 40% from its all-time high of almost $ 65,000 per coin.
Meanwhile Square (NYSE: SQ), which owns the popular peer-to-peer payments and Bitcoin Cash App trading platform, is down about 30% from its peak. Square revealed that it had just over 8,000 Bitcoin tokens on March 31 (at the time, valued at $ 472 million), so the sharp drop in the price of Bitcoin in recent times is putting a serious dent in the market. Square’s balance sheet – and that’s the likely reason for the stock dip.
Despite the negative trend of recent times, Bitcoin and Square still have a bright future. What is the best buy? The answer depends on the type of investor you are.
Reasons to buy Bitcoin
Bitcoin is considered the first cryptocurrency. It uses a decentralized digital ledger system (known as blockchain, which means that no central bank or government issues or controls it). It is a very liquid asset. Bitcoin can be traded around the clock on a crypto trading platform or app. And although a coin is worth tens of thousands of dollars, a Bitcoin is divisible into smaller parts called Satoshis (like how a dollar can be broken down into cents). One Bitcoin is equivalent to 100 million Satoshis.
As Bitcoin has gained momentum among investors and businesses, its value has skyrocketed over the past decade. It was designed to be a digital payment system that facilitates the exchange of goods and services online. But since its supply is limited (the maximum total number of Bitcoins is set at 21 million, and more than 18.7 million of them have already been “mined” so far), the price of Bitcoin is highly dependent on the demand from investors and traders.
In fact, this limited supply and growing demand is the main reason for the sharp rise in the value of cryptocurrency. Amid rising public spending around the world (which requires central banks to mint new money), some investors see Bitcoin as a better store of value than government-issued fiat money and as a hedge against it. ‘inflation. Because the number of Bitcoins is fixed, a constant increase in demand over time will mean higher prices. And if Bitcoin ever becomes a widely accepted form of digital payment, the increase in circulation could help stabilize the highs and lows inherent in the digital coin for now.
Reasons to buy Square
Square (and its subsidiary Cash App) had $ 3.67 billion in cash and short-term investments on its balance sheet at the end of March 2021, making Bitcoin more than 10% of its liquid assets. . Square is therefore an indirect bet on the price of Bitcoin. However, Square is more than a passive investor in the leading cryptocurrency.
Cash App allows users to buy, sell and hold Bitcoin in their digital wallet, as well as send and receive Bitcoin to other users (including merchants who accept it as a payment method) . Small fees (disclosed at the time of the transaction and variable depending on the current volatility of the Bitcoin market) are charged. However, Cash App currently generates little value from Bitcoin. Square revealed in its Q1 2021 earnings update that it generated $ 3.51 billion in Bitcoin revenue, but gross profit (revenue minus cost of revenue) was only $ 75 million. .
That doesn’t mean, however, that Bitcoin is a worthless business for Square. It attracted millions of new Cash App users last year by touting the ability to trade Bitcoin, and once integrated, Square can promote digital payments and basic Cash App banking capabilities to these new users. Besides being an important part of Square’s track record, Bitcoin can be seen as a marketing campaign to acquire more consumers and businesses on its platform.
Longer term, if Bitcoin gains momentum as a digital form of payment, Square’s transactional activity (it collects fees every time a payment is processed on its network) could be a major beneficiary of cryptography.
What is the best buy?
The supply and demand argument for the continued increase in Bitcoin over time is legitimate, but Bitcoin is a type of fixed asset. As recent price action shows, owning cryptocurrency can be an incredibly volatile business. This may not be suitable for all investors. If you don’t like extreme fluctuations in the value of your portfolio, keep Bitcoin and other cryptocurrencies in general as a small position (think single-digit percentages or less of your overall portfolio).
In contrast, Square is a dynamic company that uses fixed assets to grow and generate profit. It owns a significant share of Bitcoin, so shareholders will benefit if the price of Bitcoin rises. But Square also uses its crypto holdings to build its user base and promote activity on its platform. And since it’s a business that generates both revenue and profit, a tangible valuation can be placed on Square stock.
Excluding Bitcoin income, Square shares are trading around 17 times the income in the past 12 months. Free cash flow recently fell back into the red as the business spends to promote growth, but it has shown in 2019 and 2020 that it will eventually become a very profitable business (it has generated several hundred million cash flows). available cash flow over the two years).
Bitcoin may have a place in your wallet, but I personally have a bias towards companies that use assets like Bitcoin as part of their operations. Square stock is getting my nod as a best buy right now.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.