Square Inc (SQ) Tests Bitcoin: Why It's a Smart Move
Payments company Square Inc (NYSE: SQ), which enables small, medium, and big businesses to use mobile devices to facilitate point-of-sale transactions, has begun testing an integration with bitcoin, the booming cryptocurrency that's jumped more than 600 percent this year.
While Square's bitcoin test is small-scale at the moment -- select users of its Cash app are allowed to buy and sell the currency directly -- SQ stock could be a big winner if certain scenarios play out favorably for the company.
Square shares were up 2.5 percent Wednesday morning.
The bull case for Square stock. While the beta abilities in Square's Cash app only let users buy and sell bitcoin, what's far more potentially lucrative long-term is an ability to transact with bitcoin; it would almost instantaneously give bitcoin a wider base of acceptance, which gives it greater utility, which ostensibly makes the blockchain-based cryptocurrency more valuable.
[Read: 5 of the Best Stocks to Buy for November.]
If SQ is able to earn small fees off these transactions -- as it does with its credit card processors -- Square could generate fees and benefit from the rising price of the cryptocurrency, which in turn was partly caused by Square's support of the bitcoin ecosystem.
Square is not the first public company to warm up to taking payments in cryptocurrency, but it's ability to advance the bitcoin ecosystem is unique. Overstock.com ( OSTK), Dish Network ( DISH), Microsoft Corp. ( MSFT) and Intuit ( INTU) have all, in one way or another, taken payment in bitcoin.
The challenges facing bitcoin. Currencies by definition need to do a few things well. In particular, they need to serve as a medium of exchange and a store of value. Thus far, and despite its soaring price, bitcoin has failed to do either of those well.
-- As a medium of exchange, bitcoin is years away from mainstream acceptance by a majority of merchants you might run across on the street. Square can help some, but in truth the U.S. government will have to decide where it falls on bitcoin before it can be truly mainstream.
-- Bitcoin's ability to be a store of value is equally concerning. A good currency doesn't fluctuate wildly from day to day, benefiting from a stable demand and a healthy ecosystem that supports its value. Bitcoin can rise or fall by 10 percent any given day.
Still a savvy move by Square. Regardless of the issues bitcoin faces, Square has positioned itself well. After all, the future of the company doesn't hinge on this feature, it's just something Square is building out due to user demand.
There's nice upside to this move for SQ stock, especially if it helps meaningfully improve bitcoin's utility while taking fees in bitcoin. Plus, with CME Group ( CME) said to offer bitcoin futures for trading as early as mid-December, Square -- and other companies that decide to accept the cryptocurrency -- will be able to hedge their exposure to the volatile cryptocurrency and limit its downside risk.
[Read: The Best Bitcoin Wallet of 2018.]
Is flirting with bitcoin worth a 4 percent boost to SQ stock? Perhaps not. But if the company ends up fully integrating with bitcoin, it could enjoy first-mover advantages, limited only by bitcoin's potential.
John Divine is an investing reporter for U.S. News & World Report, where he covers financial markets and the economy, with a focus on individual stock analysis. He has been an investor himself for over 10 years, and has been writing professionally about stocks and investing for the last five years. He previously wrote about the stock market for The Motley Fool and InvestorPlace, and his work has appeared on Yahoo! Finance, MSN Money, and AOL DailyFinance. He graduated from Appalachian State University in 2011 with a bachelor's degree in finance and banking. At Appalachian, he was a member of the Bowden Investment Group, a team of students that ran a real-money portfolio worth over $100,000. You can follow him on Twitter or give him the Tip of the Century at jdivine@usnews.com.
