Are block shares a buy after diversifying into Bitcoin mining?

It has been a disappointing year so far Block Inc. (SQ -0.94%). The year started with a mini-rally in January and February, but a controversial short-seller report from Hindenburg Research in March has weighed on Block’s fortunes. Heading into May, Block is basically back at square one. The stock started the year at $62.84 and currently trades at $60.79.

But Block now has a new plan to turn things around and woo back investors, and that entails Bitcoin (BTC -0.11%) mining. Yes, that’s right, the company best known for its Square payment technology and Cash app is now diversifying into Bitcoin mining. Given Bitcoin’s epic rally this year (up about 70% year-to-date), there is certainly reason to be optimistic. So let’s take a closer look.

Why Bitcoin Mining?

At first glance, diversifying into Bitcoin mining does not appear to provide any synergies with Block’s existing product offering. But dig a little deeper and the strategy actually starts to make more sense. First, Block already has a huge amount of Bitcoin on its balance sheet. According to CoinGecko, Block now holds nearly $230 million worth of Bitcoin, which ranks fourth among all publicly traded companies. To put it in context, Block has almost as much Bitcoin as cryptocurrency exchanges Coinbase Global.

Second, the company’s Cash App offers users the ability to buy, sell, send or receive Bitcoin. While the bearish Hindenburg Research report questioned how many people actually did this, as well as the potentially harmless uses for this app, it’s easy to see that Block is no stranger to Bitcoin and crypto payments. With Bitcoin becoming more and more mainstream, it makes sense that Cash App will benefit from the current Bitcoin rally.

Blocks Bitcoin mining strategy

It is important to note that Block only plans to manufacture the chips and related hardware for Bitcoin mining – it does not plan to do the actual mining. While Block has been involved in a few high-profile Bitcoin mining projects, its ultimate goal is to become one Intel (INTC -2.45%) for Bitcoin mining tokens. Block has a lot of experience designing chips for its Square payment processing solutions and says it has revolutionary new technology on deck that will soon be ready for custom Bitcoin chips.

Image source: Getty Images.

To jump-start its Bitcoin mining strategy, Block recently bought a huge supply of Bitcoin mining chips from (who else?) Intel, which is winding down the business. Intel plans to wind down its Bitcoin mining chip operation by April 2024, and Block is more than happy to fill the void. Block plans to offer its own high-end Bitcoin mining chips and mining hardware early next year. In doing so, it will go head-to-head with a handful of companies that dominate the space.

Advantages and disadvantages

Will the potential synergies actually materialize? If you are an optimist, then you believe that Block can somehow integrate the new Bitcoin mining into its other core business. Theoretically, the more Block can do to increase Bitcoin adoption, the better for the stock price. In short, the logic goes something like this: Rising Bitcoin prices lead to rising fortunes for Bitcoin miners, who will be more likely to buy Bitcoin mining tokens from the Block. At the same time, rising Bitcoin prices will pump up the value of Bitcoin on Block’s balance and convince more people to use Cash App for Bitcoin. This should also increase the overall value of block storage.

If you’re a pessimist, however, it’s easy to see how things could go terribly wrong. Bitcoin mining is a cyclical business and there is a good reason why Intel is getting out of the business of producing Bitcoin chips. In good times it’s a good business to be in. But in bad times, not so much. So if you believe in Bitcoin mining for Block, then you also have to believe that Block is smarter than Intel right now.

Should you buy block shares?

Right now, there are too many questions swirling around Block to make it a buy. In my opinion, Block has still not fully addressed all the issues raised in the controversial Hindenburg Research report. And from my perspective, the claim that Block will somehow “disrupt” Bitcoin mining sounds a bit too hyperbolic. The fact that Intel entered and then exited the Bitcoin mining business in just 12 months should be a red flag for investors.

For that reason, I cannot recommend Block as a purchase right now. While I’m super-bullish on Bitcoin long-term, I just don’t think Bitcoin mining is the right strategy for Block right now.