Hindenburg Research and its damage to Jack Dorsey’s crypto empire

In the wake of a damning report by short-selling firm Hindenburg Research, Jack Dorsey’s Block Inc. (SQ) faced its worst week in over three years.

NEW FROM US:

Block—How Inflated User Metrics and «Frictionless» Fraud Facilitation Enabled Insiders To Cash Out Over $1 Billionhttps://t.co/pScGE5QMnX $SQ

(1/n)

— Hindenburg Research (@HindenburgRes) March 23, 2023

Hindenburg’s allegations, centered around overstated user numbers and involvement in criminal activity, have sent shockwaves through the crypto community and raised questions about the future of Dorsey’s impact on cryptocurrency adoption.

As a result, SQ shares plummeted from a high of $77.15 on March 22 to a low of $56.50 on March 23. As of March 31, the stock saw some growth and was trading at $68.65 at the close, still recouping from the fall.

Given Dorsey’s pro-crypto stand, how will this controversy impact the trajectory of cryptocurrency?

Jack Dorsey’s support and advocacy for Bitcoin

Jack Dorsey, the 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 pivotal role in promoting cryptocurrency adoption and integration into mainstream finance.

Notably, Block enabled bitcoin trading through its Cash App platform, and in 2020, the company made a $50 million investment in bitcoin, showcasing its belief in the cryptocurrency’s potential.

Dorsey’s enthusiasm for cryptocurrencies 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.

Yes, Bitcoin will

— jack (@jack) December 21, 2021

In addition to his investments in bitcoin, Dorsey has been a vocal advocate for developing decentralized social media platforms, hinting at his broader vision of a decentralized digital landscape.

Allegations against Block

Hindenburg Research’s report on Block contains a slew of allegations that, if proven true, could severely 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 “transacting active” figures, leading to an overstatement of the platform’s popularity.

We think Block has misled investors on key metrics, and embraced predatory offerings and compliance worst-practices in order to fuel growth and profit from facilitation of fraud against consumers and the government. (42/n)

— Hindenburg Research (@HindenburgRes) March 23, 2023

Former Block employees cited in the report estimate that 40% to 75% of the accounts they evaluated were fraudulent or “tied to a single individual.”

In addition to these user number discrepancies, Hindenburg Research alleges that Block has understated its customer acquisition costs, painting an unrealistic picture of the company’s growth and profitability.

The report also accuses Block of enabling criminal activity on its Cash App platform due to lax compliance controls, allowing bad actors to exploit the system for their gain.

Block issued a public statement refuting the allegations. The company said it is considering legal actions against Hindenburg Research, who, according to Block, is “known for these types of attacks.”

How did the market and investors respond?

The market’s response to the Hindenburg report has been swift and decisive. Block’s shares plummeted as much as 27% following the release of the scathing report, demonstrating the potential damage these allegations caused.

The impact of this decline was not limited to Block alone. Several other crypto-related companies experienced a knock-on effect, with their share prices also taking a hit.

Microstrategy (MSTR) has declined by as much as 15% since the report was published, trading at $238.96.

Meanwhile, Coinbase (COIN) experienced a drastic drop from a high of $85.38 on March 22 to a low of $60.51 on March 27, a decline of nearly 30%. But Coinbase is involved in its own battle with the SEC, so this price movement might be indicative of that.

The Hindenburg report also shook investor confidence in the broader cryptocurrency market, which led to increased volatility, with some investors choosing to reduce their exposure to crypto-related assets.

As a result, BTC, trading in a bullish market and registered bumper gains in previous weeks, has declined from a high of $28,803 on March 22 to $26,721 as of March 27, a decline of nearly 8%.

However, the crypto market – as unpredicted as it is – quickly bounced back, exceeding $28,000 levels. The leading digital asset is trading at $28,322 at press time.

Community’s disbelief

In response to the Hindenburg report, Cathie Wood, the founder of Ark Invest, expressed her disagreement with its contents, stating that the report was “wildly misleading.”

Hindenburg seems to believe that investors and analysts with deep expertise in fintech will not read its reports but that speculators and traders will support its short positions by selling without reading or understanding them. Wildly misleading, as @mfriedrichARK exposes here. https://t.co/5iueTRSMZ6

— Cathie Wood (@CathieDWood) March 25, 2023

Wood shared a Twitter thread by Ark analyst Maximilian Friedrich, which addressed some of the points raised in the report.

Friedrich pointed out that while Hindenburg claimed that Cash App was the only electronic P2P payment processor mentioned in a COVID-19 fraud indictment, the research firm did not mention that the defrauded funds had come via Bank of America Corp.

They further elaborated that most funds were cashed out using ATMs, bank branches, and BofA credit cards, with only 7% of the total involving money transfers or funds transfer services, including Cash App.

What Hindenburg tells you: Cash App was «the only» electronic P2P payment processor mentioned in a COVID fraud indictment

What Hindenburg doesn’t tell you (cut out of screenshot): The defrauded funds came via Bank of America which sent the criminal $1,256,108 in PUA benefits pic.twitter.com/hASAJDrXo5

— Maximilian Friedrich (@mfriedrichARK) March 23, 2023

Friedrich also highlighted that while Cash App, like many financial services companies, was likely used for fraud during the COVID pandemic, its spending limits may have prevented criminals from cashing out even more funds.

He mentioned that companies continuously 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 expanding ecosystem and focus on crypto growth

During Block’s first investor day in five years on May 19, 2022, the co-founder and CEO Jack Dorsey emphasized that the company has evolved significantly from its roots as a payment processor, expanding its offerings in various sectors, including crypto and music streaming.

Dorsey compared calling Block a payments company to calling Amazon a bookseller, highlighting its growth across multiple dimensions. Dorsey emphasized the importance of bitcoin’s role in Block’s future, describing it as the “open standard for global money transmission.”

Block’s crypto ventures 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 business called Spiral operates within Block as well.

According to Dorsey, Block’s acquisition of Jay-Z’s music streaming business Tidal was a bet on the creator economy. He believes that the creator economy will continue to grow as artificial intelligence reduces the need for mechanical work.

By offering tools and platforms for artists coupled with crypto, Block aims to tap into the significant market gap in artist tools.

Meanwhile, Dorsey sees bitcoin as the only suitable candidate for an internet-native currency. Dorsey’s focus on the leading cryptocurrency suggests that Block will continue prioritizing its crypto sector growth.

Response to investors

On Thursday, March 30, the payment group published an open response to the questions investors had been asking since the Hindenburg report.

In it, the company states that, according to its most recent estimations (in December 2022), Cash App has over 51 million monthly transacting actives or accounts “that have at least one financial transaction using any product or service.”

Around 44 million of those 51 millionwere connected to “an identity verified through our Identity Verification (IDV) program,” Block claims.

The road ahead

As Block and Jack Dorsey steer through the turbulence created by the Hindenburg report, their journey will be a testament to the resilience and adaptability of the company and the broader crypto industry.

In the short run, Block’s ability to confront the allegations head-on and showcase its dedication to transparency, trust, and security will be paramount.

The company can dispel doubts and rebuild investor confidence by engaging in open dialogue with stakeholders and implementing robust risk management strategies.

Over the long run, 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 creator economy, and next-generation blockchain applications.

Ultimately, the road ahead for Block and the crypto 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 at hand and emerge as a trailblazer in the ever-evolving world of cryptocurrencies.

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