Square (NYSE: SQ) added bitcoin trading to its Cash App in early 2018. The company buys bitcoin and adds a slight margin to the purchase price, but doesn’t charge additional transaction fees. Users can buy up to $10,000 in bitcoins weekly, but there aren’t any limits on selling.
By the end of 2018, Cash App overtook Coindesk as the top app for bitcoin purchases. Buying bitcoin through Cash, which was linked to a user’s bank or credit card accounts, was more efficient than using other exchanges that still required individual wire transfers.
Image source: Getty Images.
The volatile price of bitcoin, which soared above $13,000 in late 2017 and plunged to about $3,000 earlier this year, made Square’s bitcoin bet seem risky. Yet the business remained profitable, and generated $65.5 million in revenue last quarter — marking its strongest quarter to date.
Why Square’s bitcoin platform is a low-risk operation
Square isn’t buying large amounts of bitcoin and hoping the price rises. Instead, it only buys bitcoin to fulfill users’ orders, making it a middleman between users and exchanges.
The only profit Square generates is the small margin it adds to bitcoin’s market price. That conservative strategy has kept the business consistently profitable since its inception:
Source: Square quarterly reports.
Square’s bitcoin revenue accounted for 6.8% of its net revenue during the first quarter, compared to 5.1% in the prior year quarter. However, Square’s bitcoin profits only accounted for about 0.2% of its gross profit during the quarter, versus less than 0.1% a year earlier.
Square’s bitcoin business won’t…