In the wake of a damning report from short-selling firm Hindenburg Research, Jack Dorsey’s Block Inc. (SQ) faced its worst week in more than three years.
Hindenburg’s allegations, centering on exaggerated user numbers and their involvement in criminal activity, have shocked the cryptocurrency community and raised questions about the future of Dorsey’s impact on cryptocurrency adoption.
As a result, SQ shares plunged from a high of $77.15 on March 22 to a low of $56.50 on March 23. As of March 31, the stock posted some growth and was trading at $68.65 at close, still recovering from the decline.
Given Dorsey’s pro-crypto stance, how will this controversy affect the trajectory of crypto?
Jack Dorsey’s Support and Advocacy for Bitcoin
Jack Dorsey, co-founder of Twitter and Block (formerly known as Square), has long been an ardent supporter of cryptocurrencies, particularly bitcoin (BTC).
Under Dorsey’s leadership, Block has played a critical role in promoting the adoption and integration of cryptocurrencies into mainstream finance.
In particular, Block enabled bitcoin trading through its Cash App platform, and in 2020, the company made a $50 million investment in bitcoin, demonstrating its belief in the potential of cryptocurrency.
Dorsey’s enthusiasm for cryptocurrency extends beyond his business endeavors: The tech entrepreneur has frequently expressed his admiration for bitcoin on social media and in interviews.
He has even gone so far as to say that he believes the world’s leading cryptocurrency will become the “single currency” of the internet.
In addition to his bitcoin investments, Dorsey has been a strong advocate of developing decentralized social media platforms, hinting at his broader vision of a decentralized digital landscape.
Allegations against Block
Hindenburg investigation report on Block contains a number of allegations that, if proven true, could seriously damage Jack Dorsey’s reputation in the cryptocurrency space.
The report claims that Block has inflated its user numbers by including fake and duplicate accounts in its “active transactions” figures, leading to an exaggeration of the platform’s popularity.
Former Block employees cited in the report estimate that between 40% and 75% of the accounts they evaluated were fraudulent or “tied to a single person.”
In addition to these discrepancies in the number of users, Hindenburg Research alleges that Block underestimated its customer acquisition costs, painting an unrealistic picture of the company’s growth and profitability.
The report also accuses Block of allowing criminal activity on its Cash App platform due to lax compliance controls, allowing bad actors to exploit the system to their advantage.
Block issued a public statement refuting the allegations. The company said it is considering legal action against Hindenburg Research, who Block says is “notorious for these types of attacks.”
How did the market and investors respond?
The market response to the Hindenburg report has been swift and decisive. Block shares plunged as much as 27% following the release of the scathing report, demonstrating the potential damage these allegations caused.
The impact of this drop was not limited to just Block. Several other crypto-related companies experienced a ripple effect, with their share prices affected as well.
Microstrategy (MSTR) has declined by as much as 15% since the report was published, trading at $238.96.
Meanwhile, Coinbase (COIN) saw a drastic drop from a high of $85.38 on March 22 to a low of $60.51 on March 27, a drop of almost 30%. But Coinbase is involved in its own battle with the SEC, so this price move could be indicative of that.
The Hindenburg report also shook investor confidence in the broader cryptocurrency market, leading to increased volatility, with some investors choosing to reduce their exposure to cryptocurrency-related assets.
As a result, BTC, which is trading in a bull market and posted extraordinary gains in the previous weeks, declined from a high of $28,803 on March 22 to $26,721 on March 27, a decline of almost 8%.
However, the cryptocurrency market, as unpredictable as it is, rallied quickly, breaking above the $28,000 levels. The leading digital asset is trading at $28,322 at press time.
In response to the Hindenburg report, Cathie Wood, the founder of Ark Invest, expressed her disagreement with its content, stating that the report was “grossly misleading.”
Wood shared a Twitter thread from Ark analyst Maximilian Friedrich, which addressed some of the points raised in the report.
Friedrich noted that while Hindenburg claimed that Cash App was the only P2P electronic payment processor named in a COVID-19 fraud allegation, the research firm failed to mention that the defrauded funds had come via Bank of America Corp.
They further explained that most of the funds were withdrawn via ATMs, bank branches and BofA credit cards, and only 7% of the total involved money transfers or funds transfer services, including Cash App.
Friedrich also noted that while Cash App, like many financial services companies, was likely used to commit fraud during the COVID pandemic, its spending limits may have prevented criminals from withdrawing even more funds.
He mentioned that companies continually improve their risk engines. Some fintech companies might have temporarily turned them down to support struggling individuals and businesses ignored by banks during the pandemic.
Following the release of the short report, Ark bought a total of 636,543 shares of Coinbase and Block in two sessions.
Block’s sprawling ecosystem and focus on cryptocurrency growth
During Block’s first investor day in five years on May 19, 2022, co-founder and CEO Jack Dorsey emphasized that the company has evolved significantly from its roots as a payment processor, expanding its offerings across various sectors, including crypto and music streaming.
Dorsey compared calling Block a payments company to calling Amazon a bookstore, noting its growth in multiple dimensions. Dorsey emphasized the importance of bitcoin’s role in the Block’s future, describing it as the “open standard for the global transmission of money.”
Block’s crypto businesses have expanded beyond just offering bitcoin trading through the Cash app. The company has also delved into bitcoin hardware wallets, bitcoin mining, and the open source project called TBD for developers. An independent bitcoin-focused company called Espiral also operates within the Block.
According to Dorsey, Block’s acquisition of Jay-Z’s music streaming business, Tidal, was a bet on the creator’s economy. He believes the maker economy will continue to grow as artificial intelligence reduces the need for mechanical labor.
By offering artist tools and platforms alongside crypto, Block aims to tap into the significant market gap in artist tools.
Meanwhile, Dorsey sees Bitcoin as the only suitable candidate for a native internet currency. Dorsey’s focus on the leading cryptocurrency suggests that Block will continue to prioritize the growth of its crypto sector.
response to investors
On Thursday, March 30, the payment group published an open response to questions investors had been asking since the Hindenburg report.
In it, the company states that according to its most recent estimates (as of December 2022), Cash App has more than 51 million monthly active transactions or accounts “that have at least one financial transaction using any product or service.”
About 44 million of those 51 million they were connected to “an identity verified through our Identity Verification (IDV) program,” Block says.
the road ahead
As Block and Jack Dorsey navigate the turmoil created by the Hindenburg report, their journey will be a testament to the resilience and adaptability of the company and the crypto industry as a whole.
In the near term, Block’s ability to confront the allegations and show his dedication to transparency, trust and security will be paramount.
The company can dispel doubts and rebuild investor confidence by engaging in an open dialogue with stakeholders and implementing sound risk management strategies.
In the long term, Block has the potential to redefine the crypto landscape by embracing cutting-edge technologies and pushing the boundaries of innovation.
As the company moves beyond its traditional payment roots, it can catalyze the growth of decentralized finance (DeFi), the maker economy, and next-generation blockchain applications.
Ultimately, the path forward for Block and the cryptocurrency industry will be marked by bold decisions, innovative thinking, and a determination to redefine the future of finance.
By embracing these qualities and seizing the opportunities that arise, Block can overcome the challenges that come its way and emerge as a pioneer in the ever-evolving world of cryptocurrency.
