Bitcoin Jumps Past $11,000, But That’s Making Some Square Analysts Nervous

Much as cryptocurrency skeptics would like to set aside Bitcoin, the currency keeps intruding into the payments world. On Wednesday, Bitcoin began trading above $11,000, only a day after it sailed past the $10,000 mark and just three days after pushing past $9,000.

But Bitcoin bullishness isn’t helping Square Inc. any more. Two weeks ago, when the San Francisco-based company confirmed it is allowing a small number of users of its Square Cash person-to-person payment app to buy and sell Bitcoin, investors sent its stock soaring. But Monday morning it was trading around $39, down fully $10 since Friday. That pushes Square back to where it was when news broke about its flirtation with Bitcoin. Even now, Square is trading at a market capitalization—$16.73 billion according to MarketWatch.com—roughly equal to that of First Data Corp., ($15.36 billion) its much larger rival.

That, coupled with the exposure to Bitcoin’s manic pricing moves, has led some analysts to conclude the company is overvalued. Mark Palmer, an analyst at New York City-based BTIG, on Monday downgraded Square from neutral to sell, adding that Bitcoin brings unnecessary risk. Palmer could not be reached for comment. A Square spokesperson did not respond to a request for comment.

Aside from Bitcoin’s volatility, some critics point out the cryptocurrency brings no offsetting revenue stream. “Square’s stock went up dramatically when it announced the ability to buy Bitcoin using the Square Cash app. The stock went up so much that it prompted some analysts to point out that the actual revenue opportunity from Bitcoin was not meaningful enough to justify the large increase in stock price,” Gil Luria, an analyst at D.A. Davidson who follows Square, tells Digital Transactions News by email.

But while the bloom may be off the rose, Square’s Bitcoin move may yet pay off in the long run, other experts say. The Square Cash Bitcoin pilot is limited to an unspecified number of users that Square characterizes as “small,” which also limits risk. Nor does the pilot allow users to send or receive Bitcoin.

Another advantage for Square is that the pilot could yield a low cost of funds, some observers point out. “If you’re looking to entice customers to keep funds with you, why not let them buy Bitcoin, an asset with little utility and a high perceived value?” asks Rick Oglesby, principal at AZPayments Group, a Mesa, Ariz.-based payments consultancy. “Bitcoin investors are hoarding Bitcoin, which means buying it and leaving it where it is.”

Oglesby concedes that investors overreacted initially to Square’s Bitcoin move. “It probably shouldn’t have a huge impact on Square’s market value,” he says by email. “It’s in incremental change that adds value but it’ll be some time before it makes a big difference in Square’s bottom line.” This is especially true since no P2P payments provider has found a way to levy fees to users in a market where competitors make it available for free. It’s not clear, adds Luria, that payments in Bitcoin will solve that problem.

The bigger issue for Square, and Square Cash users, could be the risk that Bitcoin’s heady ascent, which some observers call a bubble, may suddenly reverse course.