These fintech companies have become major players in the bitcoin trading.
In 2009, a man known by the pseudonym Satoshi Nakamoto created what has become the world’s largest cryptocurrency: Bitcoin (CRYPTO: BTC). Since then, bitcoin prices have skyrocketed and tumbled repeatedly in dizzying volatility. These frantic price fluctuations make Bitcoin not the best financial instrument for investing (especially for conservative investors who do not accept big risks).
The risk here is also great as the potential return and invest their money in cryptocurrency possible as much to increase it, and to lose most of them.
If these kinds of fears have led you to avoid betting directly on this risky asset class that does not have a clear investment thesis (or on a digital currency that is relatively difficult to spend in the real world), then there is a great alternative for you in the form of companies PayPal (NASDAQ: PYPL), and Square (NYSE: SQ). These are companies where you can invest in Bitcoin without taking on that huge risk associated with direct investment in this cryptocurrency.
And about why and how it is, and will be discussed below.
The importance of bitcoin
In May 2018, Square provided its users with an app that allows them to buy and sell bitcoin. PayPal has followed suit with its digital wallet in 2020 and plans to add this feature to Venmo in the summer of 2021. Moreover, a report from Pantera Capital indicates that both fintech companies are aggressively buying digital currency. New bitcoins are created on a fixed formula, and the number of new coins created will eventually stop when it reaches 21 million. According to Pantera Capital, Square and PayPal are buying more than 100% of newly mined bitcoins together. In other words, they buy each newly created token, and besides that they buy some of the ones already in circulation.
During PayPal’s recent earnings report, CEO Dan Shulman noted that users have responded with tremendous enthusiasm to the launch of the bitcoin company. Significantly, Schulman reiterated the company’s plan to make bitcoin a payment instrument later this quarter. That is, they will be able to pay for purchases from any of the 29 million PayPal merchants.
While PayPal has just started taking steps in this direction and has yet to provide specific financial details, Bitcoin has already become Square’s main source of income. In fact, bitcoin sales grew from $ 34 million in the first quarter of fiscal 2018 to $ 1.6 billion in the third quarter of fiscal 2020 – a 4,600% increase in less than three years.
However, income from Bitcoin has an incredibly low margin – Gross profit for Bitcoins Square was only 2% in the last quarter. In other words, although it accounts for the majority of Square’s revenues, Bitcoin’s contribution to bottom line is negligible. So what’s the point?
For both PayPal and Square, Bitcoin is a way to attract users. This is another feature that enhances their mobile app ecosystem. And as these fintech companies add new users, it becomes more likely that these users will use other features of the applications, thus generating additional income.
For example, the Square Cash app also allows users to send peer-to-peer transfers, instantly transfer funds to bank accounts, buy and sell stocks, and shop with their Square Cash card. And users using two or more of these services transact three to four times as often and generate three to four times more gross profit than other users. In addition, 23% of Cash App users made purchases daily in Q3 of fiscal 2020, up from 15% in Q3 of FY 2018. In other words, Square’s strategy is working and PayPal is likely to see similar benefits soon.
Square and PayPal benefits
Compared to buying bitcoin directly (which is a risky investment for a variety of reasons) Square and PayPal have thriving businesses including. mostly unrelated to cryptocurrency.
These fintech companies have developed highly engaging ecosystems that empower both merchants and consumers. Whether it’s the ability to accept digital payments, invest in cryptocurrency, or transfer money to friends or family, PayPal and Square provide truly valuable services. Moreover, both of these companies have built significant networks and this has led to tangible wealth and significant revenue growth.
Finally, digital payments and e-commerce are becoming more common all over the world. And in the coming years, this trend should help PayPal and Square to stay on trend, even if the Bitcoin bubble bursts.
No investment is without risk, and there is no asset class that is guaranteed to gain value over time. But Bitcoin’s volatility and dubious long-term prospects make it unusually risky (even when compared to some of the most volatile stocks).
In addition, PayPal and Square allow investors to capitalize on the mania that surrounds Bitcoin in a relatively risk-free way. In other words, PayPal and Square shareholders benefit from buying and selling Bitcoin (all transactions associated with it), not from its current price, subject to wild fluctuations. This is why I consider investing in these two fintech companies the best (and also relatively risk-free) alternative to buying Bitcoin.