Square Shakes the Financial World With Bitcoin Investment

Square (SQ) recently bought $50 million worth of bitcoin on its balance sheet, and it's expected that other corporations could follow. Square is at the leading edge of the financial world, as its platform is being used by people to manage investments, make, and take payments.

  • SQ is a payments solutions company

  • Jack Dorsey is the founder and CEO who runs two publicly traded companies- Controversy last week

  • SQ buys a significant amount of Bitcoin

  •  

  • With a $50 million investment and possibly more on the horizon, SQ could begin to move higher and lower with the digital currency

  • A sign that SQ is attempting to change the means of exchange in the US and around the world

Technology companies have been the most explosive sector of the stock market during the global pandemic. Long before COVID-19 emerged as the most significant factor in 2020, technology had been the leading force in equities.

Technology has been the leading force in the world for decades. When I was in college in the late 1907s, a computer was a giant piece of equipment in a refrigerated room with lots of tubes. Today, the smartphone we carry in our pockets has far more computing power than those massive machines. Technology has made communication, shopping, research, and most other activities as simple as pushing a button or two on a screen. Technology has improved efficiency, lowered consumer prices, and increased the flow of goods and services. It has changed the way people conduct business and social interaction.

The global pandemic caused companies to send employees home. While many lost jobs, others were able to continue to work using technology. Social distancing and lockdowns caused more than a few issues with the supply chain, but online shopping allowed for securing essential goods.

Meanwhile, even though people needed to stay away from each other, lines of communication remained open via voice or facetime applications. Tech companies like Zoom Video Communications, Inc. (ZM) allowed for business meetings, family gatherings, and even virtual cocktail parties between friends. Technology has been a blessing during the unprecedented events in 2020. It has improved our lives and changed the way almost everything in this world gets done. Technology continues to evolve at a breakneck pace.

We have also seen dramatic technological changes in how we receive money and pay for goods and services. Cash may be king, but credit and debit cards and direct credit and debits to accounts have limited the requirements for physical forms of money.

Governments issue legal tender that has the backing of the full faith and credit of the countries that issue legal tender. Cash is king for people, but it represents control for governments. Monitoring and controlling the supply of money allows central banks and governments to monitor and steer the financial system.  In around 2010, the birth of digital currencies presented an alternative to dollars, euros, pounds, and all of the other government-controlled currency markets. Bitcoin is a global currency that was worth six cents in US dollar terms in 2010 and rose to $20,000 in late 2017. At the end of last week, a Bitcoin had a value of around $11,500.

Digital currencies like Bitcoin present a technological challenge to the status quo when it comes to means of exchange. Square, Inc. (SQ), a high-tech payments solutions company, recently made a $50 million investment in Bitcoin.

SQ is a payments solutions company

Square, Inc. (SQ), together with its subsidiaries, provides payment and point-of-sale solutions in the US and worldwide. The technology company offers software and hardware that offers sellers solutions. The company has its headquarters in San Francisco, California, and has been in business since 2009. SQ’s IPO was in 2015 at $9 per share.

Source: Barchart

As the chart highlights, the shares have moved steadily higher, reaching a peak of $193.44 in October 2020, and were near the high at over $187 at the end of last week. SQ has a market cap of over $82.6 billion and trades an average of over 10.6 million shares each day.

 Source: Yahoo Finance

The chart shows that annual revenues and earnings display an upward trajectory that supports the rise in the technology stock. A survey of thirty-eight analysts on Yahoo Finance has an average price target of $155.83, with projections ranging from $41 to $250 per share. Most Wall Street research has buy, outperform, or overweight ratings on SQ.

Jack Dorsey is the founder and CEO who runs two publicly traded companies- Controversy last week

SQ’s founder and CEO is Jack Dorsey. The company’s market cap of $82.6 billion is over double the cap of Twitter (TWTR) at below $37 billion. Mr. Dorsey runs both companies.

SQ may have a far higher value, but TWTR’s business affords it a more significant profile. The social media platform found itself in the crosshairs of public opinion last week when it refused to allow links to a New York Post story on a potential scandal and October surprise for the Biden campaign with the Presidential election less than three weeks away.

Jack Dorsey said the company did not handle the situation well.

Source: Twitter

Facebook also blocked posts relating to the article that appeared in the New York Post on October 14. 

The US Senate Judiciary Committee will subpoena Mr. Dorsey and Facebook’s CEO Mark Zuckerberg as some senators accuse the platform operators of interfering and censoring the free flow of news during the final days leading up to the November 3 election. As of the end of last week, Senator Josh Hawley formally requested Messrs. Dorsey and Zuckerberg to appear before the Senate Judiciary Subcommittee on Crime and Terrorism in a hearing titled “Digital Platforms and Election Interference.” The companies risk losing protection under Section 230, which protects TWTR and FB from liability. Section 230 of the Communications Decency Act states:

“No provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.”

Protection under the Act is a big deal for liability for the platforms. The New York post controversy comes when the US government looks to limit the growing influence and power of the leading technology companies.

The latest event could be another nail in the coffin for big tech when it comes to increased regulatory oversight and a government-mandated breakup of the leading companies, which has bipartisan support in the US Congress. Senators were accusing TWTR and FB of censoring political speech. The companies could lose protection under Section 230.

SQ buys a significant amount of Bitcoin

While TWTR gets a lot more press these days than SQ, the company made a significant move when on October 8, it announced it purchased approximately 4,709 bitcoins at an aggregate purchase price of $50 million. In a boost for the cryptocurrency, SQ’s CFO stated, “We believe that bitcoin has the potential to be a more ubiquitous currency in the future. As it grows in adoption, we intend to learn and participate in a disciplined way.

For a company that is building products based on a more inclusive future, this investment is a step on that journey.” The payments company is making a substantial bet on the future with the bitcoin investment.

With a $50 million investment and possibly more on the horizon, SQ could begin to move higher and lower with the digital currency

On October 7, bitcoin futures were trading at the $10,760 level on the high of the session.

Source: CQG

As the chart shows, bitcoin moved higher after SQ’s investment, reaching a high of $11,805 on October 13. If Bitcoin doubles or more from its current level, SQ’s investment would rise to $100 million or more. Moreover, if the company continues to make investments in Bitcoin and other digital currency instruments, the shares could begin to reflect the price variance of the highly volatile asset class.

A sign that SQ is attempting to change the means of exchange in the US and around the world

The faith in the US dollar and other world currencies has been declining over the past years. The dollar, euro, pound, yen, Swiss franc, and other fiat currencies derive their values from the full faith and credit of the countries that issue the legal tender. In a sign of the overall decline in the value of foreign exchange instruments, all currencies have declined to new lows against gold over the past months and years.

Central banks worldwide validate gold as a means of exchange as they hold the yellow metal as an integral part of their foreign currency holdings. Therefore, gold’s ascent in 2019 and 2020 has been a sign of weakness for the fiat currencies.

Governments have resisted bitcoin and other cryptocurrencies, as their rise will cause a decline in a country’s ability to control the money supply. Digital currencies are global and fly below the radar of governments, central banks, and monetary authorities that routinely intervene in the currency arena to “provide stability.” Simultaneously, it allows governments to maintain control of the global financial system for payments and flows.

Facebook’s attempt to introduce Libra, a digital currency, caused an uproar in the US Congress. SQ’s investment in bitcoin could do the same. Both companies are treading on thin ice with US legislators these days. While SQ would claim it is not attempting to alter the tools for payment in the US and worldwide, the bitcoin investment could cause additional regulatory pressure, particularly after TWTR’s latest move to ban a story with political ramifications.

2021 will be a watershed year in the battle between the US and European governments and the growing power of the big technology companies. SQ and TWTR have a combined market cap of almost $119 billion, making Mr. Dorsey a significant player at the table when it comes to oversight and the wrath of governments.  The social media platform and payments company, controlled by one CEO, are likely to face the hot lights of inquiry and could be heading for significant regulatory heat over the coming months.

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SQ shares rose $1.44 (+0.77%) in premarket trading Tuesday. Year-to-date, SQ has gained 200.35%, versus a 8.28% rise in the benchmark S&P 500 index during the same period.



About the Author: Andrew Hecht

Andy spent nearly 35 years on Wall Street and is a sought-after commodity and futures trader, an options expert and analyst. In addition to working with StockNews, he is a top ranked author on Seeking Alpha. Learn more about Andy’s background, along with links to his most recent articles.

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