Why Jack Dorsey's Square Is So Important For BitcoinBy Nick Chong
When you think of the company Square, "Bitcoin" and "cryptocurrency" are likely not the first words that come to mind. But evidence is mounting that the fintech company, captained by Twitter's chief executive, Jack Dorsey, is critically important to the cryptocurrency industry. Just look at financial data from the firm's latest fiscal quarter.
A Brief Recap
Let's take a brief look at Square's brief yet high-impact foray into crypto.
When Bitcoin flew into the quintuple digits in late-2017, interest from the public and corporations spiked. An asset that was once for those on the digital fringe — criminals, hackers, anarcho-capitalists, and cypherpunks — catapulted into the mainstream through 24/7 mainstream media coverage, social media buzz, and Fear of Missing Out (FOMO). Everyone and their mother was trying to discover ways to make money off the crypto craze.
Then Square, a financial services and technology firm headquartered in San Francisco, introduced its American clientele to Bitcoin. A little late to the party, Square's flagship product, mobile application Cash App, began to offer a barebones Bitcoin trading market in January 2018. At first it seemed that few consumers noticed, presumably because they were distracted by all the hype surrounding altcoins, Bitcoin futures, and news that other corporations and financial giants were getting into crypto. Or maybe low interest was a result of the fact that this feature of Square Cash was first unavailable in many states due to regional nuances in regulation. It took Square almost six months to secure a BitLicense, a business license for those wishing to deal in virtual currency-related activities in New York, from the state's Department of Financial Services.
Yet since its uneventful launch shortly after the peak of 2018's speculative mania, Cash App's clout in the Bitcoin ecosystem has continued to grow under the radar.
Booming Bitcoin Sales
Due to its status as a publicly-traded company, Square, which is listed under the ticker "SQ", has to release its financial reports for public consumption. This has allowed investors in traditional markets and cryptocurrency fanatics to peer into the company's financial standing. While profits are important, as is cash flow, Bitcoin enthusiasts will be most interested in the "Bitcoin revenues" and "Bitcoin costs" rows inside the reports.
According to the Q1 2019 results that were published in late-April, Square secured $65.5 million in Bitcoin revenues, implying that $65.5 million worth of BTC was purchased. The firm spent $64.7 million to sell that same BTC, meaning that Square made 1.2% of profit through its cryptocurrency business. It is important to note that Square doesn't charge trading fees, but instead sells BTC at a "mid-market" rate to account for volatility and spreads. One year ago, Square's Q1 2018 Bitcoin revenues sat at a relatively measly $34.1 million.
$65.5 million may not sound like much, especially considering that Binance, for instance, processes over $300 million worth of Bitcoin-to-crypto (and vice versa) trade orders every day. But Square's impact on the spot cryptocurrency market shouldn't be underestimated.
Cash App's Bitcoin exchange is untraditional in that it doesn’t participate in matching orders, which is very different from classical cryptocurrency exchanges. Users can buy and sell at their leisure at the rate determined best by Square. It is possible that when users sell their BTC through the Cash App, it is kept in a company wallet for a subsequent purchaser, not sold immediately. Otherwise, Square would be charging a fee to cover expenses and would not be setting a rate that accounts for volatility. The fact that Square has made a profit of 1.2% in a zero-fee environment is a testament to this. This means that when one purchases Bitcoin through the Cash App, there is no direct selling pressure on the underlying spot market.
This is just a theory, of course, as there are few details about the exact system Square employs to service its customers with physical BTC. Regardless, due to the rudimentary laws of supply and demand, any purchase of BTC through the Cash App should be a slight benefit to bulls.
Then again, $65.5 million of net capital inflows into Bitcoin still sounds strikingly low. But one must consider fiat amplifiers, which is the idea that purchasing BTC with fiat pushes up Bitcoin's market capitalization by orders of magnitude more than the nominal value of said fiat. Analyst Alex Krüger explained the concept on Twitter in early-January as “Invest a relatively large sum in a small asset (in $ terms), where additionally a significant fraction is not liquid (i.e. does not trade, sits off exchanges) => prices skyrocket. Fixed supply compounds the impact.”
While fiat amplifiers are widely believed to exist, opinions vary about the exact multiplier, which is likely a dynamic figure. In 2018, JP Morgan & Chase estimated that $2 billion worth of capital flowed into Bitcoin during fiscal 2017. During the same period, the asset's market cap swelled from $15 billion to $250 billion, all off the back of $2 billion worth of net inflow. This represents a fiat amplifier of 117.5. Some have been a bit more conservative in their estimates. Citigroup estimates a "cryptoasset" multiplier of around 50 times. Placeholder's Chris Burniske, who penned industry primer Cryptoassets: The Innovative Investor's Guide to Bitcoin and Beyond, pins the multiplier to be somewhere in between two times and 25 times — quite the range.
Considering a low-end estimate of a 25 times multiplier, Square's sales of $65.5 million worth of BTC in the first three months of 2019 may have single-handedly boosted Bitcoin's market capitalization by $1.637 billion. It may be important to note that the current actual multiplier may be even higher than 25 times because by the time December's plunge rolled around, it’s very possible that there were very few sellers at sub-$5,000 levels.
It’s also important to important to consider the amount of BTC that Square is selling, not just sales in dollar terms. Assuming Q1's average Bitcoin price of around $3,790 (CoinMetrics & The Block), Square sold an approximated 17,300 BTC during that period — Cash App's fees and spreads not taken into account. During that same time frame, 162,000 BTC was mined, assuming that the Bitcoin network keeps to its standard emission rate of 1,800 BTC each day. This implies that Square's users absorbed 11% of all BTC mined through their purchases. Considering that the sale of coins emitted by miners is considered a perpetual negative catalyst for BTC, as miners often need to liquidate their stash to fund their operations, an 11% alleviation on this pressure, dubbed a "natural selling pressure" by some pundits, goes a long way.
Square's impact on the spot market may grow even further, though. Yassine Elmandjra, the resident crypto analyst at the investment group ARK Invest, observes that if Square's Bitcoin sales (denominated in BTC) keeps pace at its current growth of 530% year-over-year (YoY), by May 2020 (Q2 of 2020), Cash App users will be purchasing over two BTC for every coin minted. Of course, maintaining 530% YoY growth, even for a market as embryonic as cryptocurrency, is easier said than done. Yet, considering Square's swelling traction in this market — not to mention the expected rally that cryptocurrencies may see in the coming 12 months — 200%, 300%, or even 530% YoY growth isn't out of the realm of possibility.
In other words, Cash App's Bitcoin market has and will likely continue to be a colossal driver for an expansion of the Bitcoin price.
A Medium Of Mass Crypto Adoption
Square could also drive mainstream adoption of Bitcoin. For starters, it is important to note that unlike traditional cryptocurrency exchanges such as Coinbase, Bitfinex, and Binance, Cash App's active user base and volumes have swelled in 2018. In the Q4 2018 edition of Square's Shareholder Letter, the company revealed that Cash App had 15 million monthly active users (MAU). This represents a 100% increase since Square last divulged this statistic, which occurred some time in late-2017. This jaw-dropping growth can be primarily attributed to the fact that the platform includes traditional fintech functions, like payments, an in-house debit card, and access to discounts at certain retailers and restaurants like Chipotle and Shake Shack.
What's notable about this figure is that when — or if — the next rally graces the cryptocurrency market, Square will act as a major on-ramp for consumers that have yet to embrace Bitcoin. As it stands, it is likely that a slim portion of Cash App's MAU actively use the Bitcoin feature. With public awareness of Bitcoin and the reputation of the cryptocurrency space rapidly rising, as Blockchain Capital determined in a recent poll, Cash App's easy-to-use, sleek, and barebones interface may quickly become a way for crypto newcomers to turn their digital pocket change into BTC. It's simple, so much so that each and every American Cash App user is just a few taps away from purchasing Bitcoin, no add-ons or app updates necessary. And, once Cash App rolls out Bitcoin support to other large markets, like the U.K. and Canada, adoption is likely to only rapidly accelerate. You do the math.
Jack Dorsey At The Helm
Square launch of Bitcoin trading is apparently linked to Jack Dorsey's love for Bitcoin. Dorsey's passion for cryptocurrency may serve Square well in the years to come.
In early-2018, just after Cash App launched support for BTC purchases and sales, Dorsey remarked that he believed Bitcoin would become the "native currency of the Internet." Then in early-2019, Dorsey again opined that Bitcoin is well on its way to becoming the ubiquitous currency of the digital world. He elaborated:
“The Internet will have a single native currency, which will likely be Bitcoin. It is something that was born on the internet, that was developed on the internet, that was tested on the internet. It is of the internet.”
In the weeks that followed, Dorsey renewed involvement snowballed. On Twitter, he publicly accepted a Lightning Network transaction, briefly hoisting the so-called "Trust Chain Torch" in a show of affection for the scaling solution. Dorsey noted that the Trust Chain, a grassroots movement meant to bolster the public's awareness of Bitcoin scaling solutions, was a "cool example" of the Lightning Network, which promotes low-cost, near-instant, secure, and private(ish) transactions.
Since early-2019, Dorsey has made appearances on Bitcoin-centric podcasts and has issued dozens many tweets about the cryptocurrency. During an interview on Tales of the Crypt, hosted by Matt Odell and Marty Bent, Dorsey remarked that he purchased $10,000 worth of BTC in the week prior, and may continue to do so for the foreseeable future.
The Future of Square and of Crypto
By many measures Square is already one of the most successful companies in the crypto industry. And this story is far from over.
Speaking to commentator Stephan Livera, Dorsey explained that Square's integration of the Lightning Network for payments, which would entice merchants to accept BTC over costly credit cards, is a matter of "when,” not "if.” He remarked that Square sees Bitcoin as a currency, rather than solely as a speculative asset. And as it stands, the widespread adoption of the Lightning Network is the most promising means to that end.
Weeks later, Dorsey wowed the community with a straight out of left field announcement. On March 20th, the entrepreneur revealed that the $28 billion Square intended to hire up to five individuals for "open source contributions to the Bitcoin and crypto ecosystem." Dorsey sees this as a way to promote “individual economic empowerment” and the creation of a “more accessible global financial system.”
Square, of course, isn't the only service positioning itself to be a fiat onramp for retail clients and an infrastructure provider for the community. Just recently, inside sources told Bloomberg that both TD Ameritrade and E*Trade, two retail-centric brokerage giants, plan to launch fully-fledged support for BTC trading in the coming months. On the infrastructural side, the Intercontinental Exchange's Bakkt is expected to rollout wallets, a merchant payment portal, among other key plays that are meant to expand crypto's value proposition.
What some of these companies may lack, however, is an established crypto-friendly user base, close ties with the millennial demographic and a Bitcoin enthusiast leading the mission.