Forget Bitcoin, buy PayPal and Square instead

These fintech companies have become major players in the bitcoin trade.

| More on:
bitcoin represented by gold coin with letter b sitting atop circuit board

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

In 2009, an individual known only by the pseudonym Satoshi Nakamoto created what has become the world's largest cryptocurrency: Bitcoin (CRYPTO: BTC). Since that time, Bitcoin prices have skyrocketed and plunged repeatedly in a dizzying display of volatility. But those frenetic price swings are just one of the reasons Bitcoin can be a risky place to invest your money.

If concerns about this digital currency have led you to avoid betting directly on an asset class that has no clear investment thesis (or on a digital currency that's relatively difficult to spend in the real world), both PayPal Holdings Inc (NASDAQ: PYPL) and Square Inc (NYSE: SQ) are companies that now offer some Bitcoin exposure without the same level of risk.

Here's what investors should know.

The importance of Bitcoin

In May 2018, Square started allowing Cash App users to buy and sell Bitcoin. PayPal followed suit with its digital wallet in 2020, and it plans to add the feature to Venmo in the summer of 2021. What's more, a report by Pantera Capital indicates that both fintech companies are aggressively buying the digital currency. New Bitcoins are created according to a fixed formula and the amount of new coins created will eventually stop when it reaches 21 million. According to Pantera Capital, Square and PayPal together are buying more than 100% of newly mined Bitcoins currently out there. In other words, they are purchasing every new token created as well as some already in circulation.

During PayPal's recent earnings call, CEO Dan Schulman indicated that users responded with overwhelming enthusiasm to the company's Bitcoin launch. Even more exciting, Schulman reiterated the company's plan to enable Bitcoin as a payment method at any of PayPal's 29 million merchants later this quarter.

While PayPal just started offering this service and has yet to provide specific financial details, Bitcoin has become a major contributor to Square's top line. In fact, Bitcoin sales have risen from $34 million in the first quarter of fiscal 2018 to $1.6 billion in the third quarter of fiscal 2020 -- that's a 4,600% increase in less than three years.

However, Bitcoin revenue comes with incredibly low margins -- in the most recent quarter, Square's gross margin on Bitcoin was just 2%. In other words, despite accounting for the majority of Square's revenue, Bitcoin's contribution to the bottom line is negligible. So what's the point?

For both PayPal and Square, Bitcoin is a way of engaging users. It's one more feature that enhances their mobile app ecosystems. And as these fintech companies add new users, it becomes more likely that those users will engage in other profit-generating activities.

For example, Square's Cash App also allows users to send peer-to-peer transfers, instantly transfer funds to bank accounts, receive direct deposits, buy and sell stocks, and make purchases using the Square Cash Card. And users who adopt two or more of those services transact three to four times more frequently and generate three to four times more gross profit than other users. Additionally, in the third quarter of fiscal 2020, 23% of Cash App consumers were daily users compared to 15% in the third quarter of fiscal 2018. In other words, Square's strategy is working, and PayPal will likely see similar benefits.

The benefits of Square and PayPal

Compared to purchasing Bitcoin outright -- which is a risky investment for a number of reasons -- Square and PayPal both have thriving businesses outside of cryptocurrency.

These fintech companies have developed highly engaging product ecosystems that empower both sellers and consumers. Whether it's the ability to accept digital payments, invest in cryptocurrency, or transfer money to friends or family, both PayPal and Square provide truly valuable services. Moreover, both have built sizable networks protected by strong moats, creating a barrier to entry (something Bitcoin lacks). And that has translated into tangible wealth and significant revenue growth.

Metric 2017 TTM Change

PayPal revenue

$13.1 billion

$21.5 billion

64%

Square revenue

$2.2 billion

$7.7 billion

246%

Data source: PayPal and Square SEC filings. TTM = trailing 12 months.

Finally, digital payments and e-commerce are only becoming more prevalent around the world. And in the years ahead, the tailwinds from those trends should help PayPal and Square continue to create value for all stakeholders, even if Bitcoin's value evaporates.

A final word

No investment is without risk, nor is any asset class guaranteed to gain value over time. But Bitcoin's volatility and questionable long-term utility makes it unusually risky in my opinion, even compared to some of the most volatile stocks.

Alternatively, PayPal and Square allow investors to benefit from the mania surrounding Bitcoin while avoiding actual exposure to the cryptocurrency. Put another way, shareholders of PayPal and Square benefit from the buying and selling of Bitcoin, not the value of a currency prone to wild fluctuations. That's why I'll take these two fintech companies over Bitcoin any day of the week.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Trevor Jennewine owns shares of PayPal Holdings and Square. Trevor Jennewine has no position in any cryptocurrencies mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends PayPal Holdings and Square and recommends the following options: long January 2022 $75 calls on PayPal Holdings. The Motley Fool has no position in any cryptocurrencies mentioned. The Motley Fool Australia has recommended PayPal Holdings. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on International Stock News

A male investor sits at his desk looking at his laptop screen holding his hand to his chin pondering whether to buy Macquarie shares
International Stock News

If you invested $10,000 in Nvidia stock the day ChatGPT came out, this is how much you'd have today

Buying Nvidia when the disruptive AI chatbot launched would have been a smart move.

Read more »

A Tesla car driving along a road at sunset
International Stock News

Why Tesla stock was climbing today

Investors were encouraged by news of a price hike on the Model Y.

Read more »

Plate with coloured wedges being parcelled out like a slice of pie representing a share split
International Stock News

Stock-split watch: Is Nvidia next?

Nvidia last split its stock when it traded for a pre-split $744 in 2021.

Read more »

A woman in jeans and a casual jumper leans on her car and looks seriously at her mobile phone while her vehicle is charged at an electic vehicle recharging station.
International Stock News

1 Wall Street analyst thinks Tesla stock is going to $125. Is it a sell?

Tesla is no longer a magnificent stock, according to a Wells Fargo analyst.

Read more »

A young man goes over his finances and investment portfolio at home.
International Stock News

Is Nvidia stock a buy?

The company's stock could rise 40% over the next two years and outperform the S&P 500.

Read more »

Man with hands in the middle of two items with money bags on them.
International Stock News

Is Nvidia headed for a stock split?

Nvidia stock has split five previous times in the company's history.

Read more »

Digital rocket on a laptop.
International Stock News

Nvidia shares surged (again) today. Is it too late to buy the red-hot artificial intelligence (AI) growth stock?

Nvidia stock has gained nearly 300% over the past year. Can investors still profit from this AI stock?

Read more »

A woman holds a soldering tool as she sits in front of a computer screen while working on the manufacturing of technology equipment in a laboratory environment.
International Stock News

Can you buy Nvidia shares on the ASX?

This stock has rocketed higher. How do we get access to it?

Read more »