Square Bets on Bitcoin to Shape Its Future

This may perhaps import a bit of bitcoin’s volatility into the company’s share price, which dipped 6% on Wednesday morning. Though any discount to its multiple would hardly make a dent: Square is trading at over 190 times forward earnings.

Still, it emphasizes the point that Square may need some pandemic-era trends, including the enthusiasm for bitcoin, to last into the future to reach the goals investors are betting on.

Take the original business of Square, providing payments and other services to small and medium-size sellers. Many of those merchants have adapted to incredibly tough conditions by adding websites, new revenue streams and virtual payments, and Square has upped spending on sales and marketing to help drive that transition. Square’s seller gross payment volume from online jumped 50% in 2020, even as its seller payment volume overall was flat for the year.

Square believes that many of its sellers will retain those omnichannel strategies as permanent features, setting them up to potentially do more volume overall even as in-store spending reclaims some share from e-commerce.

That will be very important, because the pandemic actually helped Square’s revenue take from seller volume due to a shift toward debit cards from cash, and to credit cards used remotely. These are payment forms that typically yield more to Square itself. Square noted that volume may grow faster than gross profit in the future as shopping normalizes.

Meanwhile Cash App, Square’s burgeoning consumer financial platform, has boomed amid the pandemic and stimulus. Monthly gross profit for Cash App slowed down in October and November compared with the third quarter—but accelerated in December when government payments went out and as bitcoin activity picked up. Cash App’s bitcoin buying and selling feature has been a huge lift, with 3 million active bitcoin customers in 2020.

The key to lasting growth, though, may be to convert occasional transactors into profitable, frequent users of Cash App’s wider features. So far, Square is doing well at this: Overall gross profit per active, transacting Cash App customer was up 70% from a year earlier in the fourth quarter. Customers actively using Cash App’s Boost feature, which offers discounts and rewards that now include bitcoin rewards, spent twice as much on their Cash Cards, which are debit cards linked to Cash App accounts.

Ultimately Square’s valuation may hinge less on the bitcoin-to-dollar ratio, and more on the conversion ratio of bitcoin buyers into long-term users.

Write to Telis Demos at telis.demos@wsj.com