The bigger you are, the bigger the splash when you jump in the water. And when it comes to mainstream payments companies, there are few bigger than PayPal.
In case you’ve been totally avoiding the headlines over the past few days (and who could blame you), PayPal (NASDAQ: PYPL) this week confirmed its entry into the crypto asset industry with the announcement that it was enabling the buying, selling and holding of cryptocurrencies on its platform. Within the next few weeks, users in the U.S. will be able to trade bitcoin (BTC), ether (ETH), litecoin (LTC) and bitcoin cash (BCH) using their PayPal accounts. The service will be rolled out to Venmo, a PayPal company, and to other geographical areas in the first half of next year. Users will also be able to use these cryptocurrencies to purchase goods at 26 million merchants within the PayPal network.
The market took it as good news, evidenced by the almost 15% increase in the BTC price (at time of writing) since the announcement was made. The other cryptocurrencies supported by PayPal also saw weekly returns of 10-15%.
A cheerful rally is generally good news, and this one seems to have energized a market that had been slipping into sentiment doldrums. Indeed, the PayPal news is positive for the industry as a whole. But the news is not the boost to the fundamental outlook for bitcoin and peers that many market observers seem to think.
Looking beyond the numbers
First, the news is not a surprise. We reported on this a few months ago, later adding that the actual cryptocurrency trading would be handled by Paxos.
What’s more, the details that have been added to our reporting are disappointing.
PayPal does bring over 340 million users to the crypto table. For context, Bitcoin currently has 32 million non-zero addresses (only 5 million of which are active), according to data firm Glassnode. But PayPal’s crypto users would not necessarily add to the address count, as they would not have access to their own private keys. What’s more, users will not be able to transfer their crypto holdings out of their PayPal account, nor will they be able to send crypto to other PayPal users. In other words, PayPal more or less dictates what users can do with their cryptocurrencies, and could presumably freeze accounts if they see fit, at least for now – not exactly in line with the industry’s origin and ethos.
Another aspect that has many excited is the network of 26 million merchants at which users will be able to spend their cryptocurrencies, with PayPal handling the fiat-crypto conversion. Over the years, however, the “buying stuff with crypto” use case has attracted relatively little attention, as the investment use case became more predominant. Why would people spend an investment asset, forgoing any potential gain? True, in some countries it might be easier to pay via PayPal using bitcoin, for instance, than dollars. But just because the service is now available does not mean that people will…