Why Bitcoin on Square’s Cash App Is Barely Profitable

Square released its second 2020 quarterly financials report for its Cash App on August 5, showing tremendous YoY growth for revenue and profit. Shortly after the release of the shareholders’ letter, the stock price of Square (SQ) soared 11%, according to Market Watch.

Yet despite seemingly positive news all round, the app may be hamstrung by its insistence on covering the high costs incurred by its bitcoin users. 

Square Cash Bitcoin Numbers Increase Yearly

According to Square’s second quarterly report for 2020, both bitcoin revenue and gross profits for its Cash app have multiplied since last year. The report states:

“Cash App generated $875 million of bitcoin revenue and $17 million of bitcoin gross profit during the second quarter of 2020, up 600% and 711% year over year, respectively. Bitcoin revenue and gross profit benefited from an increase in bitcoin actives and growth in customer demand.”

That equates to a gross profit percentage of 1.94% for bitcoin-related activities on the Cash app, representing 2.85% of Square’s gross profits overall.

However, the report notes that Square still recorded a net income loss of $11 million in Q2. That’s a drastic fall from its $106 million net income profit in Q1, and $391 million net income profit in Q4 of 2019. Income decreased despite an apparent spike in its overall user activity in July. As noted by Square, this spike may not be sustainable after the coronavirus lockdown ends.

“We recognize this increase may be partially driven by government stimulus and unemployment benefits, which may not sustain at the same levels during the remainder of the third quarter.”

Why Bitcoin Costs Square

In late May, a curious Cash app user noticed that Square appeared to be covering the cost of bitcoin transactions for its users. Crypto podcaster Collin Enstad wrote on Twitter on May 27:

“So today I found out @CashApp pays for your BTC withdraw fee. So I sent 12 different transactions of $1 each. They seemed to batch withdraws, with about 10 other people. Each transaction had a next block fee of about $6.”

Enstad’s highlighted transactions can be viewed here, on one of many Bitcoin blockchain explorers. It’s worth noting that the podcaster carried out his experiment just days after Bitcoin’s average fees hit a two-year high of $6.64.

Square hints at this practice in its latest quarterly report, stating that “transaction losses” tripled going into the first half of 2020.

“For the first half of 2020, provisions for transaction losses represented an increase of approximately 3x compared to the second half of 2019, on a dollar basis.”

That could be partly explained by Bitcoin’s descending price throughout the end of 2019, and subsequent increase in 2020, since Square also purchases bitcoin in anticipation of customer demand.

It can also be explained by the fact that average bitcoin transaction fees fell all the way through the final six months of 2019, meaning Square had less fees to cover in dollar value. 

Whereas high BTC fees repelled such online service providers as Steam from adopting bitcoin, Square seems to have factored this in as the cost of doing business. 

The question is: what price will Bitcoin’s fees have to reach before that cost becomes too great?

Leave a Reply