What Bitcoiners Are Missing from Square’s Q4 Report

Square announced their 4th Quarter results after the market close on Tuesday.

Square is an important company in fintech generally and for Bitcoin specifically.

Why?

Because of Cash App. The Cash App is just about the easiest way for small investors (and not so small) to buy Bitcoin. This is particularly true for buying in small amounts like $50 or $100 worth.

Screenshot of Cash App's Bitcoin Page

And Square revealed something important for the Bitcoin ecosystem in this earnings report. Something many people missed. Let's look at what they had to say.

Square Earnings Highlights


Here are a couple of the non-Bitcoin related highlights for this bellwether tech company (and a couple of Bitcoin highlights too):

  • Square added $170 million worth of Bitcoin to their own balance sheet buying 3,318 BTC at an average price of $52,365.
  • Net Income grew to $294 million in the quarter. This is the 2nd best income quarter in the company's history.
  • Total Gross Profit (not Net) grew 52% year over year to $804 million.
  • Cash App has 50% more customers, 36 million total, than a year ago.
  • Bitcoin volumes on the Cash App grew 2.5x from a year ago.

The Supply Squeeze in Bitcoin

There's a supply squeeze going on in Bitcoin. Supply is shrinking and it's getting absorbed quickly. And during all this, demand is increasing. But even if the demand was the same, the supply issues would give us an increasing price. Let's look at it in detail.

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The Bitcoin Supply

Bitcoin currently generates 6.25 BTC in every 10 minute block. That means that each hour the Bitcoin blockchain generates 37.5 new coins (6.25x6). Daily this comes to 900 BTC per day (37.5x24).

At 900 per day, that means that in one quarter of a year, we have 81,000 BTC (900x90 days).

81,000. Remember this number.

Cash App's effect on Bitcoin Supply

Now let's see how much people are buying on the Cash App. First, if you look at Square's financial statements, on the GAAP Income Statement on line 21 you see Bitcoin costs. Square accounts for Bitcoin as though it was a physical product meaning they have a cost of the product ($X) and a Revenue for the product ($X+). This is how GM's books show a car will have a COGS (Cost of Goods Sold) and then Revenue generated from the sale

Bitcoin's cost (Z21 on the GAAP statement page) is http://openbracket.ca/keditor/asp.net/upload_json.ashx?dir=file $1,715,452,000 or $1.71 billion.

Using Yahoo Finance, I looked at the weekly closing price for each week during the 4th Quarter and took an average Bitcoin price from these weekly closes. For example, the Dec 28 close is $29,374 and the Dec 21 close is $26,272. Add them and the other prices together and divide by 13 weeks.

I did that and the number I got was buy Lyrica 75 mg $18,094. This is the average weekly closing price of Bitcoin in the 4th quarter.

Important Note: December was the highest volume month of the quarter so more people bought at the higher prices of December than in the lower prices of October. This means that the average price of someone like you or me buying Bitcoin in Q4 is a little higher than this average. But this average is still important, as you will see in a second.

Now let's bring the numbers together. Square does not disclose the average price for their Bitcoin sales, only the total.

So Square's Bitcoin cost is $1.71 billion and the average price is $18,094. Divide the average into total (1.71 billion/18,094) is http://jasonwebertherapy.com/?s=search_term_string 94,506 Bitcoins sold.

Now to adjust for the December prices. To account for our note on higher prices, let's round this up to $20,000 and divide that into $1.71 billion. That number is http://towing-whittier.com/forum/viewtopic.php?page=Ivan-Cavaleiro-0f1283 85,500 Bitcoins sold.

Remember that number we calculated earlier of 81,000? 81,000 is the total number of new Bitcoin added to the supply in the 4th quarter. Both our average number and our adjusted number of 94,506 and 85,500 are MORE than the total of new supply added.

In other words, Cash App is absorbing ALL the new supply of coins PLUS a little bit more. This is before Paypal, before Grayscale ETF, before companies like Tesla or Microstrategy added Bitcoin to their balance sheets.

BEFORE ANYTHING ELSE. Cash App is taking the entire new supply of coins. This is much higher growth than expected. Grayscale is buying the entire supply for their ETF too. So before anyone else buys any, Cash App and Grayscale buy 2x the new supply every quarter.

With no change in demand, the price would likely rise given this effect on supply. With an increase in demand, price will rise. This is a fundamental bullish argument for Bitcoin.

About the author

Stu Stu Lustman, the author of this post, is a Credit Analyst by trade trying to bring Commercial Credit Analysis techniques to the world of Peer to Peer Lending. Check me out on Twitter, LinkedIn and Google+

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