Cryptocurrencies, Square Earnings, and The Motley Fool’s New Personal-Finance Brand

Are cryptocurrencies still compelling long-term investments? In this episode of Industry Focus: Financials, host Jason Moser interviews The Motley Fool's cryptocurrency expert, Aaron Bush, to find out the answer. Plus, Jason and Fool.com contributor Matt Frankel, CFP, discuss earnings from fintech favorite Square (SQ -2.28%); The Motley Fool's new personal-finance brand, The Ascent; and two stocks that are on their radar this week.

A full transcript follows the video.

This video was recorded on Nov. 12, 2018.

Jason Moser: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market each day. It's Monday, Nov. 12. I'm your host, Jason Moser. On today's show, we're going to talk Square earnings. It appears that millennials lack the confidence to invest. We'll tap into Twitter, we'll have One to Watch for you.

We're starting this week with a little bit of a new feature. I was thinking recently, and I thought it'd be fun to at least try. My goal here is to bring these to our show as often as possible. Let's call it a semi-regular segment we're going to introduce. It's going to be a 10- to 15-minute interview, talking with people who we feel like can make us smarter, have a little fun in the process there. It's a segment I'm calling Between Two Fools. 

Aaron Bush is a Fool of many talents, one of which is spearheading our Crypto Society service here at The Motley Fool. This week, on Between Two Fools, Aaron and I talk about his interest in cryptocurrencies and the opportunities he thinks they present investors.

Aaron, there's a lot of noise in the media regarding crypto, cryptocurrency, Bitcoin, ethereum, all of this stuff. It can become overwhelming at times. Let's go back to the very basics of why this all exists in the very first place. Why does crypto matter? Why now?

Aaron Bush: This is all about the future of money. It sounds a little crazy, but I have a theory. My theory is that we're all becoming cyborgs. If you look at the way that we work, the way that we increasingly socialize with social media, how we find entertainment, how we learn, how we increasingly wear devices, where healthcare is moving -- all of these different things, it turns out that our behavior as humans is increasingly digital, and our behavior is merging with the internet and all of these interesting components of that. The same exact story is happening with money. The human economy is becoming a cyborg, and the future of money really is digital. From a pure technology standpoint, that makes a lot of sense. But I think there are other important ripple effects to consider with that. 

For one, a huge deal is that the government's monopoly on money and monetary policy is broken. That's a huge deal. 1776 represented the separation of church and state. 2008, when Bitcoin was founded, that represents the separation of money and state. That's abstract. It's something that most people, I don't think, at least that I've talked to, they haven't even thought to question that, because it's such a basic foundational part of our lives. 

But let me offer a little bit of perspective. It's easy to get caught up in our bubble here. The first part of that is, in the U.S., the most common question I have is, "Why do I need this Bitcoin thing? Why do I need this crypto thing? I can go to Starbucks and order my coffee just fine with a dollar."

Moser: That was going to be my question. You're killing me here. I have the War on Cash basket. I'm loving these four holdings. But I understand what you're saying. What you're saying makes a lot of sense. I could superglue your iPhone to your wrist, but that's essentially the same thing. You're right. We are becoming cyborgs to an extent. We're more and more reliant on these devices. These shifts happen very slowly, until all of a sudden, you notice it happened, right?

Bush: Yeah. I think what's interesting here is, it's easy to get caught up in our own bubble in the U.S., saying, "The dollar works just fine for all the things that I need." But I think it's important to understand that Bitcoin in particular, the most pressing use case there isn't Starbucks, it's Venezuela. Bitcoin as a currency, as a store of value, it seems kind of laughable to us in the U.S., where we have a strong currency, a stable economy. But for people in emerging countries, where oftentimes there are authoritarian governments that take advantage of monetary policy, so that their currencies inflate into being worthless, this actually is a brilliant way out for them. I think that's really important to consider. This isn't about the U.S. This is about a global movement, really inferring people up from bad government decisions. 

The other piece of this is that the same technology that enables Bitcoin also enables other use cases. It's easy to get caught up on Bitcoin, but really, there's a lot more to that.

Moser: You're talking blockchain, is that right?

Bush: I would say blockchain is just a type of database that keeps track of who owns what, when. In and of itself, it's interesting, but it's really one piece that makes something like Bitcoin work. If you can have a full history of who owned what, when, that's a key component in having a digital currency, because you can keep track of your scarce tokens. 

Bitcoin does not have that much programming flexibility. There really aren't that many things that you can do with it. You can hold it and you can trade it. Ethereum, which is the other big cryptocurrency that a lot of people know about, it added much more programming functionality. A lot of the same technical components that make Bitcoin work, add a little bit more and you can have smart contracts. You have more functionality, you can have projects, raising money in Ethereum to do things like file storage, help with compute power, prediction markets, decentralized applications, and a lot of other things. If you can do that with money as a foundation, you can also build things like decentralized trading, lending, financial storage. You start to see the beginnings of a digital financial system. And if digital money is a big deal for people in other economies who are struggling, then adding all of those component layers is a huge deal. It breaks down a lot of barriers.

Moser: I've always felt like having that track record of who owns what, when, to me, it felt like the real estate market would have been, or may be, one of the greatest markets for digital currency, Bitcoin, blockchain technology, have a lasting impact. Having gone through the process of buying a house, selling a house multiple times, there's so much money that's incinerated in that process because of redundant paperwork that doesn't really serve anyone's purpose, other than to make sure someone else isn't going to get sued.

Bush: Totally. There are private blockchains and public blockchains. Private blockchains are when that core database functionality is embedded into your tech stack. Real estate could be a really interesting example. It could save a lot of money just by using blockchain instead of the current standard today. If you think about logistics, keeping track, not of who owns something when, but where something is when. A lot of the same advantages you get there can help cut costs. 

Maybe in supply chain logistics, some back-office financial functions, you'll see private blockchains come into effect. I'm pretty skeptical overall of private blockchains. I think it's something that's still pretty experimental today. We'll have to see it play out. I think public blockchains, it's much more disruptive to the foundation of money in general. I think that's a much bigger deal. 

I'll just say one last thing about the abstractness of this. I read a fascinating book, it was called The Sovereign Individual. This is a book that has slowly been making its way around in crypto circles. The core thesis of that book is that the structure of society is determined by the logic of violence. I'll break that down a little bit. Humans are absolutely the best at finding ways to create value, to create wealth. And when we create wealth, we have to find ways to protect it. If you look back across history, we started as hunters and gatherers. We really just worked as tribes. But as soon as we moved to agriculture, just through the process of tilling and like cropping, we finally had resources to store and protect. And at the same time that you have something to store and protect, that's when you start needing to organize ways to protect that with militaries and such. So, you start to see the onset of city-states. And they start growing their military might. And suddenly, you start to see, humans are good at creating wealth. We move past agriculture into other elements. And then, the same time as that, we move past city-states to nations, to superpowers. Small companies turn to multinational companies. We have tons of laws and organizations that all work together to protect this wealth.

So, really, the history of the economy of humans is that we've seen centralization of power to protect wealth. Why this movement is super interesting to me is because, for the first time in human history, it moves us away from that trajectory of centralization. If we create wealth digitally, we can now protect it digitally. If we do that, because digital money completely disregards national borders, it's not part of a country, it no longer needs government support and militarizes to protect it. In other words, the logic of violence is changing because the ways to steal and protect wealth are changing. 

If the sovereign-individual thesis is true, then when the logic of violence changes, so does the structure of society. So, I expect that as cryptocurrencies and the related technologies that are built around it go mainstream, governments will increasingly be less relevant economically. Which sounds crazy. There's a lot to all this I just said. But money doesn't live in a vacuum, and if money changes, a lot of other things have to change, too.

Moser: Of course. Now, we're always, obviously, focused on the investing angle here. We want to circle back to what this means for investors. We get questions from listeners all the time on this. I want to get your approach to investing in crypto. Real quick, I want to go back to one thing we were talking about earlier, talking about store of value versus medium of exchange. That was one of the first questions that came to my mind when cryptocurrency came about. How do you view this? It's hard for me to perceive it as a store of value with the volatility. I get the medium of exchange. Maybe it's going to take some time to get there. What do you think?

Bush: I think it's sort of a chicken and egg problem. Stability is a property that grows over time. It has to start one place or another. What we're seeing with Bitcoin, really, as a store of value, people are starting to adopt it. Belief around the currency, just like what happened with gold hundreds, thousands of years ago, it's starting to take place. There are tons of people around the world that are working to make the technology more scalable. Right now, there just can't be that many transactions that happen per minute, per hour. But there are ways that can be improved, and it will change. The chicken and egg problem should start to change.

Moser: Final question for our listeners: your approach to investing in cryptocurrencies. You run our Crypto Society here at The Motley Fool. You get to talk about this stuff all the time, read about it all you want. Give us some hands-on ways to invest in cryptocurrencies that hopefully don't just disappear into nothing.

Bush: Investing in crypto is super hard. Just, straight up.

Moser: As I've come to find!

Bush: These projects don't have cash flows. They can't be valued as companies. Really, what these are is mini-economies. They're mini monetary marketplaces. 

Really, there are two traits that matter most when you're looking to invest in crypto assets. The first one is, are people using it? Is trade volume growing? The second is, is there a solution to the velocity problem? What that really means is, are people holding? For a lot of projects, people will just buy the token and then use it for whatever it is. But if they just buy and sell immediately, no one is holding. If you look at how GDP is calculated, or the size of any economy, how big that becomes, a lot of it is determined by how much people are holding your value. The more people are holding, the larger your market needs to be to support all the trade that goes on on it. Those are the two main things. Are people using it? Is there really a reason for people to hold on and have the velocity of money slow? Kind of Econ 101. 

And really, most projects are failing on both of those fronts. Scaling is really hard. Even for a lot of these projects that are worth something like $300 million now, they have maybe 200 daily active users. It's really sad. It's pretty pathetic, actually, that their valuations are so high. But like a lot of the things we've talked about, it's still really interesting. It will happen, it's just a matter of when. One thing I like to say is that now's the best time to learn so that you can capture tomorrow's opportunities. All of this stuff is improving. I think Bitcoin in and of itself is still probably one of the most asymmetric investing ideas out there. There are lots of other interesting projects. You can come on to Crypto Society if you want to check it out. But I'll leave it at that.

Moser: I'm sure our listeners learned something today. I know I did, too. Aaron, thanks for coming on this week. 

Bush: Thanks for having me.

Moser: As always, joining me in the studio this week via Skype in South Carolina, Certified Financial Planner, Mr. Matt Frankel. Matt, did you have a good weekend?

Matt Frankel: I sure did. It was a little cold here, but it was my daughter's birthday party. We had a good time.

Moser: Oh! Happy birthday! How old is your daughter?

Frankel: She's 3. We're out of the terrible twos -- officially, anyway.

Moser: That's one of two for you, right?

Frankel: Yeah, the next one is going to be 2 in about a year and a half. Seven months old now. 

Moser: Man, oh, man, you've got your hands full. Mine are 12 and 13. Trust me, it does get easier, but you've still got a little ways to go.

Frankel: [laughs] I know, we're not quite out of the danger zone yet.

Moser: [laughs] Well, Matt, I know that you and I were excited to kick off earnings coverage this week talking about one of our favorite businesses out there, Square. Square reported, to my eyes, a very good quarter. There were a lot of good things to take away. The stock certainly has been selling off since the release. The point I was making over the weekend was, No. 1, the Friday sell-off really took it back to where it started the week to begin with. Then, we've seen some selling in the market today. Of course, there's been some additional volatility with Square. It's never been a stock that looked cheap by any means, because really, they're still getting started. Valuation has always been a key risk here. 

When you look at a quarter like this, you see a lot of good signs there. To me, the one that stands out with a company like Square, I always look to gross payments volume to get an idea as to how healthy the business is. How many people are using it? What is that volume looking like? For me, I'm really encouraged here. Gross payments volume was up 29% from a year ago to $22.5 billion. I like to put that into context with other players in the space. If you look at PayPal, for example, for the same quarter, their gross payment volume was $143 billion, and that was up 25%. Square looked like they picked up a little bit of share there, a little bit of a faster growth rate there for Square.

All in all, I was very encouraged by the quarter. What's your take?

Frankel: You're right, gross payments volume is the still by far their No. 1 revenue stream. One of the big reasons it sold off is, growth slowed down a little bit, 29% as opposed to 30% year over year growth last quarter. A 1% dip, we're not that concerned about. I'm definitely not. 

The thing that really stood out to me was their subscription services revenue. This is still a pretty small part of Square's business. It was about 19% of the revenue total. This includes things like their Caviar platform, Square Capital, the business lending service, the Cash card that's linked to people's Square Cash app. Subscription services revenue was up 155% year over year. That's an amazing growth rate, and it's still a pretty small portion of the total. If they can even maintain half of that growth rate for a few more years, this could become a serious force to be reckoned with. 

Another one is, hardware revenue was up. To be clear, hardware is not a big part of Square's revenue. It's about 2% of their overall revenue. But when they're selling more hardware, that means more sellers are adopting their product, which is a very good sign. Especially their newer products that are geared toward larger sellers with higher payment volumes, like the Square register all-in-one payment terminal, as opposed to the little card readers that you see in a craft market. That's a very encouraging sign, as well. Remember, Square has yet to monetize their Cash app, which is, the most popular of all of their products and services, in terms of number of users. 

Having said that, this quarter looked really, really good. Just, like I said, a 1% slowdown in growth. Their fourth quarter guidance was not quite what the analysts had been looking for. We really don't care that much about guidance if all the numbers look great from a long-term standpoint.

Moser: You mentioned the hardware side of the business. For lack of a better descriptor, it's kind of like the gateway drug. You give your merchant a taste of how easy that transaction process can be. But it's really about getting that hardware in their hands so that they can experience how convenient and helpful the software side of the business can be. I feel like that's where their secret really lies. That's why we hear them talk so much about all of this different software they're developing for different particular markets, whether it's retail-specific or restaurant-specific. They do not look at this as a one-size-fits-all. It's kind of a bespoke way of approaching things, but it seems to be working.

I know that one of the biggest questions in the near-term for this company is going to be finding a new CFO, of course. Sarah Friar is getting ready to step down. I believe this was her last conference call. She's obviously been a rock star for the company up to this point. Do you have any feelings there as to whether this should be an internal hire that comes up? Or do they need to look externally? Do they have a time limit here that you're looking at? Is this something you feel like needs to be taken care of ASAP? Or can we be patient?

Frankel: The sooner, the better, especially in terms of the stock price. The market hates uncertainty in any form. Having said that, I have full faith that Jack Dorsey and his team will find the right person for the job. You'll know if the market thinks they're the right person by the stock's reaction after the announcement. Whether it's an internal hire or not, I have full faith that they'll find the person that they need to. In the long-term scheme, the grand scheme of things, this is going to be a non-issue. In the intermediate term, Sarah Friar has been an absolute rock star CFO. It's going to be some big shoes to fill. But the growth potential of this company is bigger than any one person. As long as they get the right person in for the job, I think they'll do just fine long-term.

Moser: Yep. Sounds like Jack Dorsey is going to need the support of his team here. I'm sure he'll get it. 

Matt, in today's day and age, there are a lot of questions when it comes to personal finance. Anything from finding a new credit card, to finding an online stockbroker, to figuring out if you could cut your mortgage payment, how to get a mortgage, how to get out of debt. There are a lot of questions that come up here. And there are plenty of ways to find things these days out on the internet. All you have to do is type something in the search bar, you can come up with something. But we, here, at The Motley Fool have a neat part of the business, something new that maybe some of our listeners haven't heard so much about yet. We'd certainly like to get this out there for them to learn more about. It's called The Ascent. Tell us a little bit about The Ascent, Matt.

Frankel: The Ascent is our recently launched personal-finance brand. I'm fortunate enough to be doing a little bit of writing for it. Basically, The Ascent is more the personal-finance side, not the investing side of the financial world. The Ascent covers things like getting a new credit card, why you need a credit card, how your credit score works, things like that. In addition to that, they have a ton of content on saving money. Over 50% of people don't understand what a CD is, or that you can get one online, or why it's better than a savings account. These are the kind of questions you can answer. 

Personal loans are a relatively new form of financial tool. Mortgages, as you mentioned. You can compare mortgage rates online, learn the types of mortgages, what you need to know before you buy your first house, things like that. On the investing side, this answers basic questions like, how do I choose a brokerage? Do I really need to pay commissions when some of them do trades for free? Things like that. What you need to know before you buy your first stock, what is a mutual fund. The basic questions. Fool.com is more oriented toward people who have a basic knowledge of stocks and investing in general. The Ascent takes it a step back and helps people through the basics that may not be as well-covered.

Moser: That's great stuff. To give our listeners the address, you can find more on The Ascent by going to www.fool.com/the-ascent. Or, you can just type in your search bar "Fool Ascent," and it's probably going to bring you right to it. It's a really neat website with a lot of great information, a lot of helpful information. I tell you, Matt, it sounds like there are a lot of folks out there that can use that information. Based on a recent Wells Fargo survey that you and I were reading about, it sounds like a lot of millennials not only are a little bit skeptical, perhaps, of the markets, but they are definitely not confident enough to feel like they can get out and invest in the markets. And according to this research here, 20% of millennials said they'll never be invested in the markets. I mean, I've said things before that I wish I could go back and change, but you can't so you don't. Hopefully, some of these millennials will look back to this one day and say, "Maybe I shouldn't have said never." But it's certainly a strong emotion, to say that. 

When you lack the confidence in something like that, to me, typically, it's because you lack the knowledge. You lack the knowledge or the ability to do something because you haven't been taught it. I don't necessarily blame people for feeling this way if they weren't taught about this kind of stuff at a younger age. It's one thing for us to say it, but it's a big world out there, with a lot of people who just aren't getting the financial literacy education we feel they need.

What runs through your mind when you read the through surveys like this? You can tie that back to The Ascent, as well.

Frankel: It's absolutely an education issue. As a former high school teacher, I could spend the whole episode here talking about the lack of financial education going on in America right now, and what needs to be done about it, but that's another conversation for another day. 

The statistic in that survey that jumped out to me the most was that 53% of millennials say that they will never be confident in investing in the market. Only 20% said that they'll never invest. There's always going to be some subset of any age group that is afraid of the markets. A lot of millennials, for example, saw their parents lose their houses or get really burned in the financial crisis, and are scared of the markets, and that's not going to change no matter what. But the difference between that 53% that say they won't be confident to invest and the 20% that will never invest, that's still a third of the millennial population that pretty much acknowledges that they're going to invest, but they aren't confident in doing so. 

What education like that provided by The Ascent can do is walk you through the basics of why you shouldn't be scared to invest. Market corrections and crashes are a normal part of the market, if you handle them correctly. Educational tools like that. Comparing different brokerages to find out which one's right for you, so you're comfortable. I had a colleague, actually, one of our editors recently approached me and said, "I want to start investing, but I have no idea which brokerage to go with." Things like that can point you on the right track and manage your expectations correctly, and break the misconception that investing is this big, scary casino, and just put things in perspective for you. It's a big educational lack of understanding in the financial world. That's what we're trying to fix.

Moser: Casino! Yeah, somebody hasn't gotten all the way back from Vegas yet, it doesn't sound like. That's all really good stuff. I think you're absolutely right. I tell you, for a future Between Two Fools segment, I'm going to be really excited to bring my daughters into the studio for ten or 15 minutes. Really, that'll be between three Fools. We'll be talking a little bit more about their investing journey thus far, not only their perception but really the perception among their peers, and perhaps how schools are addressing this, if they are at all. It'll be interesting to get a student's perspective about that.

Let's tap into Twitter for the week. Got a lot of kind words out there, some neat ideas, too. We were talking about Square's earnings earlier. I had some questions regarding the quarter and how I felt about the stock. I'm a big fan of the stock, as you guys know. I own shares. I recently added more as our trading guidelines allowed.

Kirk on Twitter, @KirkRunner, he said that he has been doing the same -- adding, adding, adding, little by little. Keep adding to your best ideas. Love that mentality, Kirk. It's one that, I'm telling you, if you keep at it, it definitely works out, adding to your winners. One of the greatest lessons I ever got from David Gardner here. Add to your winners.

Josh, @JohnsonJosh. He said, "Picked up some Square today to add to my Mastercard and PayPal. Just need to add Visa and my War on Cash basket will be complete. Thanks for showing me the way. Fool on." Josh, you got it, buddy. We're happy to help. That's why we're here. Just to clarify, I know we've talked about doing some more on the War on Cash coverage here on the show. We'll do a quarterly update, every quarter after earnings season on the War on Cash basket, so we don't do overkill. There's always going to be time to talk about these companies. We'll give you updates every quarter, and we will include that in next week's show, as well.

Andy, @ACourtWR8, says, "Thanks for the coverage on Fiserv." Andy, you got it, my friend. We're happy to help. It's a company that's been under the radar for a lot of folks, but it's a neat business with a pretty strong little competitive advantage out there. It's going to be one we'll continue to cover here on the show for you. 

As always, folks, we love it when you reach out to us via email at [email protected]. You can always get us on Twitter @MFIndustryFocus, so keep doing it. We get a little lonely sometimes. Sometimes I have to reach out to Matt on Slack just to see what's going on, because I'm not getting any tweets from you guys. Just, every once in a while, you know, give us a little love.

Matt, as always, let's wrap up the show with One to Watch. What's the stock that has your interest this coming week?

Frankel: I've talked about it a few times. I don't think my War on Cash basket will be complete until get some Green Dot (GDOT 1.07%), ticker GDOT, in my portfolio. That's one that I'm really watching this week. They just reported earnings, reported a monster quarter. Earnings were up almost 70%. Fourteen percent revenue growth. They raised their full-year guidance. One thing to point out is, this is a company with massive growth potential. A lot of their partnerships that we've talked about are not reflected in their revenue yet because they're brand new. They're growing revenue great on their existing product lines. Their banking-as-a-service is really picking up. The number of active accounts was up 150,000 year over year just on their core business. This is a business that has tremendous growth potential, but is already very profitable. Their guidance calls for earnings per share of about $3.20, which means they're trading at 25 times earnings. If you look at the valuations of some of the other War on Cash stocks, that's rather cheap. This business has tremendous potential, already very profitable. I'm excited to see what they do over the next couple of years.

Moser: Good stuff. I'm going a little bit unconventional this week. I'm going with Eventbrite (EB 0.39%), ticker EB. What does Eventbrite have to do with payments? Austin is looking at me right now through the window shaking his head at me. Listen, Eventbrite is a brand-new company. New IPO, just out on the public markets here recently. Eventbrite itself is event planning, event management for small-scale events to large-scale events and everywhere in between. 

The neat thing about Eventbrite is this relationship they have with Square. They have a connection with Square in that Square invested $25 million in Eventbrite back in August of 2017. We go back to Square's earnings really quick, I just want to make the point that while Square did report GAAP profitability, it's worth noting that the source of that GAAP profitability was the mark to their Eventbrite investment. In other words, Eventbrite has panned out very well for them so far. The stake that they held in Eventbrite became a little bit more valuable. They made a note in the call that it had about a $38 million positive impact on the earnings side for the quarter. Without it, Square would have actually been in a loss of about $17 million. That's that's neither here nor there. My point is that Square is going to be running Eventbrite's payments platform here. They signed a contract that goes out through the next five years. A lot of attractive growth prospects with Eventbrite, which means there should be some interesting growth prospects for Square, as well, given their partnership. I'm looking forward to the earnings out later today. We'll learn a little bit more about Eventbrite and what they feel like the future has for them. 

One last quick shout out to my alma mater, Wofford College. I graduated Wofford 1995. A little while back, I connected with Calhoun Kennedy there in the Office of Advancement. Long story short, I'm actually heading down there to South Carolina this week, Matt. I'm flying down there tomorrow. Going to go speak with Finance Professor Philip Swicegood and his students there at Wofford on Wednesday about all sorts of things finance-related, Fool-related, life-related. As you can imagine, it's been a little while since I graduated. Maybe I could offer up a couple of helpful tips for those guys down there. Really excited to get there and check it out. I'm going to be really excited to bring back some takeaways for next week's show. Wofford, look out, here I come. Matt, thanks for joining us this week. Always great talking with you.

Frankel: Always a pleasure.

Moser: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. This show is produced by Austin Morgan. For Matt Frankel and Aaron Bush, I'm Jason Moser, thanks for listening. We'll see you next week.