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Cryptocurrency Finance The Pandemic

PayPal Now Pals With Bitcoin

PayPal has been around since 1998. Bitcoin’s first proof came in 2009. Now, they’re, apparently, of marrying age, and digital currency has taken another step towards becoming a mainstream, acceptable payments and investment solution. The move was clearly hastened by pandemic-related uncertainty about the health of the US dollar and so many US consumers getting comfortable this year with online digital payments..

Earlier this month PayPal, the grandad of payment systems for ecommerce, announced that in the U.S. it would begin accepting Bitcoin (and other cryptocurrencies including Litecoin and  ETH, the currency of Etherium apps). This will allow Paypal account holders to relatively easily buy, hold and sell cryptocurrencies. The company plans to expand the same functionality to Venmo (which is owned by PayPal) and some international markets in the first half of 2021. The service is enabled in the U.S. through a partnership with Paxos Trust Company, a regulated provider of cryptocurrency products and services. 

PayPal is not the first major company to recognize Bitcoin as a form of payment.  A 2020 survey by HSB, a cybersecurity company, found that 36% of small-medium businesses in the US accept Bitcoin. These include well established companies like Microsoft, AT&T, and Wikipedia. Overstock, the e-commerce giant, was among the first retailers to accept Bitcoin payments, in part because of the crypto zeal of its CEO, Patrick Byrne. And other fintechs, notably RobinHood and Square, have been dealing in crypto for years. 

But putting up a “Bitcoin accepted here” shingle does not necessarily mean it’s being used for purchases. (I have one friend who bought a high end antique car with Bitcoin, but studies like this one from Bloomberg show scant evidence that it is much used in transactions.)

So why is the PayPal/Bitcoin announcement such a big headline? Because it’s about possibility and legitimacy. 

For one, there’s the sheer magnitude of the PayPal universe. PayPal and Venmo have around 375 million accounts combined. They processed more than $222 billion in payments last quarter. Together they reach a mega-universe of potential users that could use Bitcoin to shop at the 26 million merchants on its network

And PayPal is venerated. It began its foray into ecommerce payments so long ago that before it came along the only game in town was sending a money order or check if you wanted to buy goods online. PayPal’s willingness to accept Bitcoin gives it a stamp of approval.

Second, PayPal is eliminating the risk of using BitCoin to make a purchase. Its digital wallet will hold cryptocurrency as simply another form of funding. But, PayPal will convert the crypto purchase to dollars to pay the merchants. The intent is to diminish concerns surrounding volatility, cost and speed of cryptocurrency-based transactions. And PayPal isn’t taking a commission from those who trade Bitcoin on it’s platform. Instead it’s hoping that it’ll make money on the uplift in the number of transactions.

Since it hasn’t launched yet it’s hard to know whether buying Bitcoin through PayPal and the Paxos Crypto Brokerage will make the often awkward process of purchasing and owning the virtual currency easier or not. One hopes so.  What is known, at least at the onset, is that Paypal’s Bitcoin won’t be transferrable to other accounts, on or off PayPal.  That should deter users from using crypto for more nefarious purposes. 

Will Bitcoin increase in value with PayPal as its ally? 

Crypto pundits are already attributing the recent boost in Bitcoin value to a post-announcement uptick. Brian Estes of Off the Chain Capital, an investment firm focused on blockchain assets, likens it to what happened in 2013 when Coinbase came online and offered a convenient way to move buy, sell and hold the digital currency. Bitcoin then shot up 5866%. (Prior to Coinbase you had to wire money to Mt.Gox in Japan or go to a Bitcoin meetup.) Convenience counts.

And there’s a ripple effect. “The PayPal announcement is not in a vacuum,” says Michael Terpin of the Transform Group,a coin advisory firm, pointing to other recent developments. “In less than a week”, he says, “we have JP Morgan telling its best customers to invest in Bitcoin, a large Singapore bank backing a crypto-to-fiat exchange, and multiple corporations touting their purchases of Bitcoin as a treasury asset.”

Off the Chain’s Estes likens the PayPal’s announcement to what led to the growth of network communications.  “As Bitcoin and crypto assets become more accessible to the masses, their values will increase based on Metcalfe’s law.”  (That states that a telecommunications network gets more valuable as more users get connected to it. “We use this model–users squared times the transactional value equals the value of Bitcoin”, Estes explained in an email. “This model indicates Bitcoin’s fair value today is $42K. As more users come onboard and more transactional value flows through the network, the more Bitcoin will increase in value.”

Other Bitcoin watchers are more circumspect. Fintech pundit and author David Birch argues that Bitcoin is still a speculative currency that people like to buy and hold, in hopes that its value will continue to rise. In a Forbes column he writes, “I think this is a step towards the transactional environments of the future where private digital tokens compete with public digital tokens (CBDCs) across a payments landscape that is utterly different.” In other words, he reasons, “why would you waste even a tiny fraction of a Bitcoin buying a pizza or a Pez dispenser? People who will use their PayPal wallets to exchange bank dollars for a claim on PayPal’s Bitcoins are simply investing.” 

For PayPal the adoption of Bitcoin is just one salvo in a full frontal campaign to get users to think about the payment service in broader terms than they generally do today. “The shift to digital forms of currencies is inevitable,” Dan Schulman, CEO of PayPal,  said in a press release announcing the new features. He wrote that he wants PayPal to “meaningfully contribute to shaping the role that digital currencies will play in the future of global finance and commerce.”  

The Digital Currency Group’s State of Crypto report for 2020 notes that crypto has performed well as an asset class this year, and with less volatility than in previous years.  PayPal’s acceptance of Bitcoin adds to the stability. This marriage further legitimizes the crypto evolution.

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