When Julius Caesar crossed the Rubicon, he uttered the famous phrase ālea iacta est (“the die has been cast”). On October 21st, we had one of those moments for bitcoin and cryptocurrencies. PayPal, one of the biggest payment companies in the world, with a market cap of $240 billion, 346 million users and 26 million merchants will soon allow its customers in the US to buy, sell and HODL Bitcoin, Bitcoin Cash, Ethereum and Litecoin. In a press release the company announced that its new cryptocurrency service will be available in the US. in the coming weeks and by early 2021 customers will be able to use crypto to shop with its network of 26 million retailers. PayPal is offering this service to its US customers, then plans to add more geographies and features over time. PayPal also plans to expand the service to Venmo, its peer-to-peer payment app popular with younger consumers, by the first half of next year. While the announcement is cause for excitement, there is one big problem with the new service. PayPal users won’t be able transfer their cryptocurrency into or out of PayPal, nor will users have control of the private keys. PayPal is not alone here, Robinhood, Revolut and eToro are all in the same boat when it comes to crypto ownership. While there are many places to buy crypto which and keep ownership of the coins, there is no question that the announcement of PayPal’s crypto service is huge piece of news and has the potential to bring millions and millions of new users to crypto world and propel Bitcoin’s usage beyond speculation.
Ilias Louis Hatzis is the founder and CEO at Kryptonio, a bitcoin and cryptocurrency “keyless” wallet, that lets users manage bitcoin and crypto, without private keys or passwords.
PayPal’s foray into crypto, is a strong bullish sign for Bitcoin and other cryptocurrencies. For the last 20 years, PayPal has built an enormous user base and has helped millions of individuals and businesses send and receive money. The 350 million people that already use PayPal, trust it with their money. With its recent move, PayPal adds adds a level of credibility and trust to Bitcoin and crypto.
Today, we are announcing the launch of a new service that will enable customers to buy, hold and sell #Cryptocurrency directly from their PayPal account. https://t.co/QS6JRmG9hs pic.twitter.com/uHBatfZkbF
— PayPal (@PayPal) October 21, 2020
As you can imagine, Bitcoin’s price went up more than $1,000 on Wednesday after PayPal’s announcement, shooting up to $12,800, far above the previous high in July 2019. Since the announcement, CoinMarketCap.com shows that Bitcoin went all the way past $13k.
Other fintech companies, such as mobile payments provider Square, stock trading app Robinhood, neobank Revolut, and social trading brokerage eToro already allow users to buy and sell cryptocurrencies. All have had a huge boost in user growth and revenue because of their crypto offerings.
PayPal’s and crypto offering is similar to what its rivals are providing. For now Square is the only one that allows Bitcoin withdrawals, while RobinHood and Revolut are still not there. All of them have made millions in revenue though their cryptocurrency services, which is probably one of the motivations behind PayPal’s decision.
In the second quarter of this year, Square reported a huge increase in bitcoin revenue, generating $875 million, a 600% increase from the year before. For Revolut, cryptocurrencies was the most viral product it has launched to-date. The impact of cryptocurrencies was enormous, resulting in a huge growth in user acquisition and paving the way for a $500 million round in February, valuing the company at $5.5 billion.
In the second quarter of this year, PayPal processed $222 billion in payments and the big question for PayPal’s crypto service will be if users will use it to pay merchants for goods and services.
Cryptocurrencies’ volatility poses risks for merchants and shoppers. Also, transactions are slower and more costly than other mainstream payment systems.
With its new service, PayPal will try to address these issues. PayPal will manage the risk of price fluctuations and merchants will receive payments in fiat. When customers choose to pay via one of the four cryptocurrencies, the PayPal merchant will still receive the respective fiat amount, just like always. The merchant won’t even know in which cryptocurrency the customer used to pay. There will be no additional fees charged to the merchant for accepting and receiving cryptocurrency.
In effect, cryptocurrency simply becomes another funding source inside the PayPal digital wallet, adding enhanced utility to cryptocurrency holders, while addressing volatility, cost and the speed of cryptocurrency transactions. PayPal becomes a “second layer” that uses Bitcoin, but does not use blockchain. Most likely PayPal will hold a supply of digital assets and when user pay an online merchant, the transaction will not take place on the blockchain, but only in PayPal’s database.
Importance of PayPal’s decision
In the past, PayPal was not supportive of cryptocurrencies, actually it was anti-crypto. In 2018, Bill Harris, its previous CEO, called Bitcoin “the greatest scam ever”.
A lot has happened since. Bitcoin started a bull market cycle again, even exceeding $13,000 in June 2019. The launch of the Facebook Libra in that same month also changed a lot of things. PayPal was one of the founding members of the Libra association, before leaving the project under pressure from US. authorities. Now it has found itself changing its narrative and going in the other direction.
This is undoubtedly a turning point for Bitcoin and other cryptocurrencies. PayPal decision to enter the crypto market is noteworthy, because of its size. For the first time, a company of this size allows its users to hold and use cryptocurrencies through its application. There’s no comparison in the potential exposure for bitcoin and cryptocurrencies, between PayPal’s offering and that of any other company in the past. This is probably the biggest step in the spread of digital assets, since the birth of Bitcoin. Not only will PayPal bring 346 million users, but also 26 million merchants who will now have the ability to offer Bitcoin as a payment method. Even if 1% of its users decided to purchase cryptocurrencies, that would mean another 3 million new users. PayPal has the potential to scale cryptocurrencies to hundreds of millions in transactions everyday.
Overall this news is important, verifies that Bitcoin is here to stay, will help build more awareness and trust with the general public, but there is also some risks here.
When I first heard of bitcoin, my first thought was “I already have a PayPal account to buy things online, why do I need bitcoin”? At the time, I failed to understand that bitcoin was a currency, not just a transfer protocol. I failed to understand you can store bitcoin long term.
Now, the same will happen with all the new Bitcoin users that PayPal brings to the market. Yes, they will buy and sell cryptocurrencies and we’ll see more transactions, but they will lack the knowledge of that they can really do with cryptocurrencies. Keeping them locked in to their platform, PayPal will give them a false perception of how Bitcoin works.
Some, will research and realize that there are other alternatives, and that you actually can own your bitcoin. But, the majority will remain content with PayPal’s offering, due to their inherent trust in the platform and that PayPal must know what’s best for them.
The race for Bitcoin has started, corporations are investing huge sums in Bitcoin we are seeing major companies changing their stance, from sworn enemies to frenemies. PayPal’s announcement will drive millions of people to the world of cryptocurrencies, will help make cryptocurrencies mainstream, publicly accepted and widely adopted.
Subscribe by email to join the other Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research)