Block pins net losses on BTC’s fading consumer demand

Jack Dorsey’s digital payments firm Block (NASDAQ: SQ) posted a net loss in its third quarter, with at least some of the blame pinned on fading consumer demand for BTC.

Figures released Thursday show Block generated revenue of $4.52 billion in the three months ending September 30, 17% higher than the same period last year. Gross profits rose 38% to $1.57 billion but expenses rose by nearly one-half, resulting in a net loss of $18.7 million, significantly worse than the $3 million loss in Q3 2021.

Block’s operations are split between the Square merchant payment system, the Cash App consumer business and the Buy Now Pay Later operation it acquired earlier this year. Cash App represents the bulk of revenue ($2.68 billion, +12%) and gross profit ($774 million, +51%), but while the bulk of Cash App’s revenue is driven by BTC, the BTC profits remain a tiny fraction of the whole.

Block treats sales of BTC to Cash App customers as ‘revenue’ and total BTC sales during Q3 fell 3% year-on-year to $1.76 billion. Gross profit from BTC fell 12% to just $37 million, representing less than 2% of BTC revenue and less than 5% of Cash App’s total gross profit. Block chalked up the negative growth to declines in both BTC’s fiat value and consumer demand.

Block also booked a $1.6 million impairment charge on the value of its BTC holdings, better than the $6 million charge in the same quarter last year and a damn sight better than the $36 million hit Block took during Q2 2022, during which the broader crypto market fell off a cliff.

For the year-to-date, Cash App’s BTC revenue is down more than one-third to $5.28 billion. Stripping out the BTC contribution, Cash App’s overall revenue is up nearly 30% for the year.

Last week, Block announced plans for Cash App to further integrate the Lightning Network, the alleged Layer 2 solution to the BTC main layer’s notorious seven-transactions-per-second capacity. Previously limited to sending BTC via Lightning, Cash App users can now opt to receive BTC Lightning payments as well, although with a cap of $999 in total transactions per week.

Block shares closed Thursday down 1.35% to $53.90 but enjoyed a double-digit surge in after-hours trading. Block shares peaked at nearly $266 last November, mirroring the overall ‘crypto’ market’s outsized bubble. Since then, Block has similarly mirrored the crypto crash, shedding nearly 80% of its value.

Save us, Elon! 

Dorsey failed to mention BTC on Thursday’s earnings call and not a single analyst asked a single question regarding the BTC business, reflecting the token’s negligible contribution to Block’s bottom line. There also weren’t any questions regarding the progress of Block’s Texas-based BTC mining partnership with developers Blockstream.

Despite that mining operation’s plans to use Tesla-supplied solar and battery power, there also weren’t any analyst questions regarding Elon Musk’s recent acquisition of Twitter, Dorsey’s former alma mater. Perhaps Dorsey had instructed the moderator to turf any BTC- or Musk-related queries, but there is considerable interest considering that Jack still holds a 2.4% stake in Twitter and is hell-bent on expanding Block’s BTC/Lightning business, while Musk is equally hell-bent on monetizing virtually every aspect of his new social media plaything.

There are obvious synergies between the pair’s ambitions. This spring, Dorsey, Musk and ARK Invest CEO Cathie Wood discussed whether BTC would ever become the “native currency” of the internet. (Musk was dubious.) On Wednesday, Wood was at the Web Summit tech confab in Lisbon, where she addressed Musk’s Twitter buy and his vague plans for an “everything app” called X that might resemble China’s WeChat.

Wood reminded the audience that Musk was part of the original PayPal team and that he and Dorsey “working together, I think, could turn this into a super app… maybe there’s something they’re doing with Cash App.” Wood imagined X as “your bank branch in a pocket,” a place where one could do all your shopping, banking, loans, etc.

(Before anyone anoints Wood as some tech oracle, consider that she bought over 150,000 Block shares this week and the price dropped about 10% in the days following her shopping spree. Through the first three quarters of 2022, investors who shorted ARK’s eight exchange-traded funds have made over $2.4 billion. The ARK Innovation ETF has fallen over 60% so far this year, hitting its lowest mark since March 2020.)

Besides Wood, MicroStrategy (NASDAQ: MSTR) founder/tax fraud Michael Saylor is equally eager to see Twitter embrace BTC. On his own analyst call this week, Saylor praised Block’s further integration of Lightning and has been tweeting about Twitter doing likewise before Musk even expressed interest in the platform.

Players 2, 3 and 4 have entered the game 

We can’t forget Musk’s weird fondness for the Dogecoin joke token, which Tesla’s website (NASDAQ: TSLA) accepts for merchandise sales (but not for cars). Twice in the past seven weeks, Musk has tweeted reminders of the non-vehicular items you can buy with Doge.

And then there’s payment processor Stripe, which partnered with Twitter (NASDAQ: TWTR) in April to enable the social network’s “creators” to receive payouts from their Ticketed Spaces and Super Follows earnings in Circle’s USDC stablecoin (via the Polygon network). Other tokens were supposed to be added later but, given that Stripe just laid off 14% of its staff this week, perhaps they’ve got other priorities.

But hey, why stop at one token when you can offer them all? On Wednesday, Binance founder Changpeng ‘CZ’ Zhao, who contributed $500 million to Musk’s Twitter buyout, said that it would be “very easy” for a reimagined Twitter “to support a dozen, a couple of hundred cryptocurrencies as payments, citing his own Binance Pay system as the Baskin-Robbins of crypto flavors.

CZ said he’s yet to discuss the situation at length with Musk but appears open to sitting on Twitter’s new board of directors (assuming he’s not sitting behind bars in some jurisdiction that finally has had enough of his exchange’s flagrant lawbreaking).

There is an obvious solution to Musk’s Solomonic payments dilemma: Bitcoin SV (BSV), which offers a strong, scalable and secure Layer 1 with transaction fees measured in fractions of a cent. But where would be the glory in that for Musk, who evidently suffers from a compulsion to be the center of attention, the fount of all wisdom and the master of his domain?

Ultimately, no one but Musk knows what Musk will do about establishing an official digital payment system for Twitter or ‘X’ or whatever’s left standing in another year or so. The mercurial Musk could announce several plans before scrapping them all and going with something completely different, like a bespoke token coded by all the former Twitter engineers he’s fired and locked up in his basement. Has anyone trademarked Muskoin yet?

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Ethereum, FTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.