3 Nov 2020 | Crypto Market
On October 21st, the payment processor giant, Paypal announced that their clients will be able to use cryptocurrencies as a funding source, starting early 2021. The initial support will be limited to Bitcoin (BTC), Bitcoin Cash (BCH), Ethereum (ETH), and Litecoin (LTC).
PayPal explained that, through this move, they want to “build understanding and adoption of cryptocurrency”. Naturally, such news fueled another investment rally in the market with Bitcoin appreciating 16.46% since the press release. Currently, the value of 1 BTC equals $13,584, with a global market capitalization of just above $250 billion.
Obviously, there is no technical analysis beating fundamental news of this proportion as investors view PayPal's crypto support as a clear signal of the final stage of blockchain-based asset’s wider adoption.
If we dig deeper into the product PayPal offers to its customers, we come to understanding that, essentially, the company enables buying, selling, and holding cryptocurrencies, with them as a custodian. PayPal also disclosed, that consumers will be able to pay with crypto coins for services directly from their crypto balance and service providers will, in turn, receive fiat without any incremental fees, effectively making PayPal the middleman between two transacting parties.
In simplified terminology, if an individual wants to buy a t-shirt with Bitcoin in a web shop, he can do so through PayPal. Behind the scenes, the following process transpires:
Thus, in reality, PayPal becomes a cryptocurrency exchange and a custodian, visible to more than 300 million clients around the globe.
Custody for the sake of it is something frowned upon in the cryptocurrency space. However, custody as a gateway to other services is what can separate good service from a bad one, especially in the rising DeFi niche.
For example, Finxflo keeps custody of users’ FXF token if they want to use the benefits of the ecosystem. Therefore, in order to get access to the best global prices of cryptocurrencies at competitive fees, investors need to deposit some FXF to their platform’s wallets. That way, traders are able to reap all the benefits of trading across 25+ exchanges through a single user interface and from a single wallet.
Staking and liquidity mining on Finxflo also demand placing funds with the custodian, in this case, the company itself. However, offering high returns for users’ crypto is something that sets apart such services from PayPal's.
PayPal's system, while useful, isn’t something that the crypto market didn’t already have to offer. For example, such a service was launched by the US-based cryptocurrency exchange Coinbase back in February 2018. A similar product is also provided by Robinhood and Square. Therefore, it is understandable that PayPal, after leaving the ice-breaking process to less-known competitors, decided to enter the crypto space with an already tested product.
However, PayPal offers crypto education to all its clients within its renowned mobile app, which could very well prove crucial for onboarding new crypto users. With its wide reach and reputation, this financial giant can, and probably will do more for cryptocurrency adoption than the whole marketing machinery in the crypto industry combined.
Looking at things from that perspective, it is clear why the price of BTC surged as it did and why the Bitcoin market dominance surpassed 60% for the first time since August.
Historically, Bitcoin dominance is highly related to cryptocurrency market cycles, as related as it can be in such a young ecosystem. While cryptocurrencies were going through the biggest bull market in the history of the world, Bitcoin’s dominance was well under 50% from May 2017 until the bubble-burst at the very beginning of 2018.
Therefore, the new-found BTC market dominance, quite possibly produced by this outstanding piece of fundamental news might be working against the market as a whole. On the other hand, we can’t neglect the possibility of the new money influx happening through PayPal, which could, in turn, help create another bull run similar to the one witnessed in 2017.
Just like with all such big announcements, the consequences will be visible in the future as the way the market reacts to the new player through the years. However, there are some things visible immediately.
As a custodian, PayPal keeps users’ cryptocurrencies in its system. This way, the company effectively deprives its clients of the benefit to fully control their own assets. The right for an individual to be “his own bank” was introduced by Bitcoin in a way that the owner shares all the benefits as well as responsibilities of such a system. PayPal, thus, holds private keys of crypto assets deposited in users’ crypto-wallets, while one of the oldest proverbs in the crypto industry says “not your keys - not your crypto”.
By providing custodial and exchange services to crypto users, PayPal takes the responsibility for the funds just like Binance or any other centralized cryptocurrency exchange does. By providing the payment processing services, PayPal does exactly what Coinbase does. However, the level of trust that customers have towards PayPal might just provide the edge to reach more users than its competitors in the crypto space. The fact that the very core of that system goes directly against the trustless finance theory of cryptocurrencies is, according to the market’s reaction, irrelevant.
Nevertheless, some notable market players, perhaps feeling threatened by the finance giant entering the sphere, didn’t miss a chance to unearth their intriguing opinions. Thus, the leading cryptocurrency hardware storage producer, Satoshi Labs, published the following statement in their official blog titled “Why you should not use PayPal for Bitcoin”:
"Do not use PayPal for bitcoin; there are many other places to buy crypto which will let you keep ownership of your coins."
It is more than obvious that not all already established cryptocurrency market players share the growing enthusiasm towards PayPal within the crypto space. Therefore, the following question naturally arises.
The answer to this question is of many layers and highly dependent on the individual perspective.
For starters, from a speculator’s point of view, PayPal is exactly what the market needs as promotion and as the pump-mechanism of certain cryptocurrencies. These individuals follow one of the oldest global market’s maxim - buy the rumor, sell the news. While not contributors to the industry in general, these individuals wait for contributors to produce something that will work towards their benefit. As such, speculators do welcome PayPal and all other major players to enter the crypto market.
The exact opposite stance is taken by the decentralization enthusiasts who were the first ones supporting the new technology. From their angle, while PayPal is something that will enhance the visibility of crypto, it represents everything that Bitcoin was produced to fight against - a centralized middleman and a custodian making a living off the financial traffic.
Naturally, these perspectives represent the black and white view of the new player in the industry. There is much grey matter between the opposite camps with as many valid arguments why is this good or bad. However, one thing is certain…
These words were written by William [Bill] H. Harris as the title for his contributing blog post published by Vox.com on April 24th, 2018. Bill Harris is one of the founders and a former CEO of PayPal, and, to put things into perspective, the time of his publication coincided with the early stages of the post-bull run crypto market crash.
Therefore, either the company nurtures (and always did) entirely opposite feelings towards Bitcoin (and all the other cryptocurrencies), or something has changed since 2018. If the former, then it is dubious why PayPal didn’t hop on the bandwagon much earlier. However, if it’s the latter, then it becomes clear that PayPal anticipated some serious movement in the now much more established crypto market and wants to take advantage of the situation.
In any case, we won’t make an attempt to answer this question in our reader’s stead. However, we will suggest doing thorough research on benefits and risks before using any platform as an onboarding ramp towards the crypto space, a crypto custodian, or a crypto payment processor.