PayPal users can now buy, hold, sell and even pay with cryptocurrencies
On October 21, 2020, certain news, relevant for the crypto space and its attempt to get to mass adoption, made a lot of noise. PayPal had announced plans to offer customers a new service that would allow them to buy, hold, and sell cryptocurrencies. It is worth noting that at the time of the announcement, popular companies like Tesla had not yet publicly announced that they were buying Bitcoin or at least planning to do so. Even well-known major banks like Morgan Stanley and Goldman Sachs had not yet announced that they were launching Bitcoin funds, giving their customers access to Bitcoin, or otherwise getting involved in the crypto market through investments. At the time of the announcement, the price of bitcoin was still trading at just under $12 000. Today, the price only recently has hit its all-time high at $63 000. However, in October of last year, this news was like a liberating blow. Since then, bitcoin and the entire crypto market has rallied, pushing bitcoin's market cap beyond $1T and the whole crypto market to $2T. After the price crash triggered by the Corona Pandemic’s liquidity shock that hit financial markets in March 2020, most cryptocurrencies had swiftly moved close to pre-Corona price levels. This was followed in the summer 2020 by a rally driven by the hype around DeFi (Decentralized Finance). When the news hit the market that PayPal will add cryptocurrencies to its service, the price of Bitcoin had just approached the August 2020 high of just under $12 000 again. Since then, the Bitcoin price has only known one direction and has risen by almost 375% in the course of a breathtaking rally in the coming months until April. Certainly, there are numerous factors behind this development, and one cannot attribute it solely to PayPal's announcement. But experts agree that this announcement can be seen as one of the starting signals. In this article, we will look at what Paypal’s announcement means and what has happened in the meantime.
What did PayPal do?
Expectations were high following last October's announcement. Will PayPal actually enable its customers to buy bitcoin? And even more, will it really allow its customers to pay with it? The answer today is clear and simple: Yes. PayPal has followed its words with actions, and barely half a year later, it is reality: PayPal users can now buy, hold and sell cryptocurrencies such as bitcoin or ether using the service they already know. In addition to that, PayPal announced that as of March 30th, customers in the U.S. can now pay with their cryptocurrencies at millions of online merchants worldwide. For every bitcoin long-term hodler and maximalist, this must be like a long-awaited dream coming true. Bitcoin maximalism is to believe that bitcoin is nothing less than a paradigm shift within the macroeconomic fabric of our global economy. A world economy built solely on Bitcoin.
Bitcoin maximalists believe that bitcoin is the only digital asset that will be needed in the future and that all other digital currencies are inferior to bitcoin. And PayPal, as a world-renowned player that has now embraced cryptocurrencies and moreover integrates them into its existing service gives these ideas a boost, of course.
After all, it means nothing less than perhaps the most significant step towards mass adoption of cryptocurrencies. With more than 29 million merchants, PayPal users can now pay with not only bitcoin and ether but also bitcoin cash and litecoin. In order to pay for their purchase, they can convert their cryptocurrency into fiat currencies directly at checkout. In this video, you can see Dan Schulman, CEO of PayPal, buying shoes online with bitcoin. He demonstrates the new feature, which PayPal has now implemented and is ready to use for American customers. It is a milestone to see bitcoin and other cryptocurrencies listed as a payment option alongside well-known options like Visa, MasterCard, or American Express. To at least partly illustrate the dimension of these developments and their potential impact on the crypto market, it is worth taking a look at the figures. According to Investopedia, MasterCard generated $16.9 billion in total revenue on $6.5 trillion in payment volume in 2019 alone. Visa generated $23 billion in total revenue on $8.8 trillion in payment volume during the same period. PayPal saw its Total Payment Volume increase last year, growing 31% to $936 billion. If now these companies give their customers access to the crypto market, it is, on the one hand, a great sign for the confidence of these players in this crypto market, and on the other hand, it is an immense increase of new participants. Just recently, PayPal CEO Schulman announced that it would only be a matter of months, or perhaps less, for PayPal's crypto service to reach $200 million in volume. PayPal may very well break new boundaries when it comes to digital payments for commerce. Moreover, just yesterday news came out that Venmo, a social payments service app owned by PayPal, with over 70 million customers, is adding crypto support to its service. This announcement of Venmo, which is especially popular among millenials, is another step towards giving people easier access to the crypto market.
"The shift to digital forms of currencies is inevitable, bringing with it clear advantages in terms of financial inclusion and access; efficiency, speed and resilience of the payments system; and the ability for governments to disburse funds to citizens quickly," said Dan Schulman, president and CEO, PayPal.
Other fintech companies, such as mobile payment provider Square and stock trading app company Robinhood, already allow their users to buy and sell cryptocurrencies. But PayPal's sheer size and worldwide recognition is what sets it apart in this case.
PayPal has more than 346 million active customers worldwide and processed about $222 billion in payments in the second quarter of 2020 alone. The significance for the crypto market is immense, as it makes it extremely easy and convenient for a large new crowd of customers to become market participants. Figure 1 shows the current appearance of the PayPal app, including the new crypto functions. One can see how user-friendly the interface is. PayPal's many years of experience in successfully dealing with its customers certainly comes in handy. It seems for the user that he merely has to navigate in the app as he is used to, with the exception that he can now also buy bitcoin. What happens in the background is unimportant for the user.
The principles of wallets, private and public keys are not relevant for most customers at first glance. However, it is recommendable to explore the matter in more detail and develop a basic understanding to protect oneself and one's capital.
Nonetheless, according to industry experts, the user-friendly approach is precisely what will be the big breakthrough for blockchain and cryptocurrencies in the retail sector. In the retail sector, it will probably be similar to what has happened with computers or the Internet, for example. At the end of the day, users are more interested in helpful and easy-to-use applications than in the technology that runs in the background.
Figure 1: User Interface of PayPal App offering Crypto services, PayPal, Q3-20 Investor Update
Online shopping with bitcoin
PayPal rolls out a crypto checkout feature in the US. PayPal users with cryptocurrencies in their wallets will be able to buy goods and services. This new feature will launch with millions of merchants which will only expand further in the coming months until the full 29 million of PayPal’s merchants are available. The technology in the background, which enables PayPal users to purchase with bitcoin, is provided by the company Paxos and its crypto brokerage service. It handles the crypto custody for PayPal and is the processing partner for the trading of cryptocurrencies via PayPal. It is through Paxos' APIs that PayPal is able to offer its crypto services so seamlessly within the PayPal app with its familiar simple and intuitive user experience (see figure 2). It was through Paxos that PayPal received the first conditional virtual currency license from the New York State Department of Financial Services.
Figure 2: Operating Metric of Paypals’ Crypto services, Paypal, Q3-20 Investor Update
However, PayPal also wants to promote the safe use of cryptocurrencies and therefore offers information and educational opportunities to its customers. It is a positive development that more people can now easily access the crypto market and thus benefit from its upswing. Yet, caution is also called for at times. Cryptocurrencies are still volatile, and not every cryptocurrency is worth an investment. According to CoinMarketCap, there are more than 4500 cryptocurrencies. Clearly, just like in any asset class, one should only invest in matters that one understands. Investors need to do their own research and e.g. read into the whitepaper to understand the purpose of the cryptocurrency. This will not decrease the likelihood of volatility, but investors can better understand the risks involved in their investment. It is important to be well-informed and risk-aware when navigating in this young market. Especially with an increasing number of different ways to invest in cryptocurrencies, investors have to build substantial knowledge to navigate this space. 21Treasury was founded for this purpose - to help its clients to explore and understand digital assets and their intricacies.
What impact will PayPal's decision have on the crypto market?
The news of PayPal shows how much mainstream payment solutions are looking to integrate cryptocurrencies in their solutions, bringing more value to the industry while making payments through cryptocurrencies a seamless experience. More companies across different industries will likely follow with cryptocurrency adoption relatively soon as the entire industry is gaining a lot of interest and credibility. Both will only increase as these giants enter the industry. For example, Visa announced on March 29, 2021, that it will allow the use of the USD Coin cryptocurrency, a stablecoin cryptocurrency whose value is directly pegged to the U.S. dollar, to process transactions on its payment network.
According to J.P. Morgan, retail investors have purchased more than 187,000 bitcoin worth $10.4 billion through PayPal and Square in the last three months (see Figure 3).
Institutions have bought 173,000 bitcoin worth $9.6 billion in the same period. Just a few days ago, Grayscale purchased another $1 billion worth of bitcoins. These figures show that both retail and institutional investors are increasingly investing in bitcoin. Above all, it is clear that offers like PayPal's, i.e. giving customers easier access to the crypto market, are being accepted. In addition, it should be noted that the current price rally is driven equally by institutional money and retail investors.
Figure 3: Bitcoin purchased through PayPal and Square, J.P. Morgan
As bitcoin and the cryptocurrency industry become more mainstream, growing demand has also arisen from people seeking involvement in its success. Besides people pursuing direct exposure to cryptocurrencies by buying them on crypto exchanges, a number of exchange-traded funds (ETF) have recently been introduced to the stock market, offering their holders 1:1 exposure to bitcoin. There is also a growing demand for exposure to crypto in the stock market. For this reason, J.P. Morgan recently made an SEC (Securities & Exchange Commission) filing showing its intention to launch a "Cryptocurrency Exposure Basket." This basket includes 11 publicly traded companies in the U.S. that either hold bitcoin in their treasury or are exposed to the cryptocurrency industry in other ways, such as digital payment solutions (PayPal). This shows that investors are increasingly interested in companies that also provide crypto-related services or hold a percentage of their treasury in bitcoin. All in all, this is good news for crypto adoption. And of course, PayPal's move is also a big, promising step for the crypto market from a retail perspective. A large customer base has gained simplified access to cryptocurrencies. The media attention has been significant. Finally, the following aspect should not be underestimated: on the one hand, buyers can now choose to pay with cryptocurrencies, and on the other hand, merchants can decide to accept cryptocurrencies as a means of payment for their goods. The future will show to what extent these offers will be adopted. Expectations are high. And the signs are promising. For PayPal itself, it looks like its involvement in the crypto sector is here to stay. According to CEO Dan Schulman, the company wants to increase its activities far beyond just buying, selling, and holding cryptocurrencies. The company is working closely with regulators to accept other forms of digital currencies. The integration of a central bank digital currency (CBDC), such as a digital Euro or Dollar, is also conceivable in the future. PayPal also has plans to set up a dedicated business unit to handle PayPal's crypto ambitions. This crypto unit of PayPal is experimenting with smart contracts, testing Ethereum and other blockchains as potential candidates to help the company improve payments and other transactions.
It is certainly a smart move to take advantage of its large and pioneering role as a fintech pioneer and jump on the crypto bandwagon early. Critics say that was a vital move because the crypto market is rallying countless projects that want to offer payment processing faster and easier than currently offered and are working on solutions. PayPal has now taken a step ahead of this for the time being, since with its sheer number of customers, PayPal is somewhat ahead of its competition in this regard. It remains to be seen whether PayPal succeeds in asserting itself against the multitude of newly emerging competitors. But perhaps there also is great potential in the interplay between fintech and crypto. PayPal may also have to deal with the increasing implementation of Defi applications. Possibilities are endless.
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