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Will PayPal Usher in Mainstream Bitcoin Adoption?

PayPal has confirmed to the European Commission that it’s taking “unilateral and tangible steps to further develop its capabilities” in the cryptocurrency sector. In a letter sent in March but publicized only recently, the international payments giant explained that it’s examining how “crypto-assets can be utilized to achieve greater financial inclusion.”

PayPal recently confirmed its going to start offering cryptocurrency buying options

This is big news for the cryptocurrency industry. With over 300 million users worldwide, PayPal has the platform and the reach to make cryptocurrencies easily accessible to the general public. If its users come to crypto, they may very well pass crypto on to millions of others outside of its ecosystem.

Rather than Facebook’s non-decentralized digital asset Libra, it’s PayPal’s embrace of decentralized cryptocurrencies such as Bitcoin that may end up being the catalyst for substantial mainstream adoption. That said, it’s not clear when PayPal will bring any of its cryptocurrency solutions to the market. More importantly, cryptocurrencies themselves may need to learn how to scale and may need to become less volatile before PayPal’s customers start using them in large numbers.

PayPal Delves Deeper Into Crypto

Last June, PayPal joined the Libra Association, the consortium of companies set to govern Facebook’s Libra stablecoin. It became the first company to leave the Association in October, however, citing a desire to focus on its own core business.

It seems this “core business” now includes cryptocurrencies. In its letter to the EC, it revealed that it’s “continuously monitoring and evaluating global developments in the crypto and blockchain/distributed ledger space,” and is interested in cryptocurrency for a variety of reasons.

It wrote, “Of particular interest for us is how these technologies and crypto-assets can … help reduce/eliminate some of the pain points that exist today in financial services. We also have great interest in how these technologies can be used to promote transparency and enhance compliance efforts.”

Such comments are somewhat vague. However, unnamed industry sources revealed in June that PayPal (as well as the PayPal-owned Venmo) is indeed planning to let customers buy and sell cryptocurrencies directly through their platforms, in conjunction with offering a digital wallet service. This will be an extension of PayPal’s pre-existing partnership with Coinbase, which since 2018 has allowed Coinbase customers to withdraw fiat currencies directly to their PayPal accounts.

Adoption And Bitcoin Price

Taken together, the official letter to the European Commission would seem to confirm the reports from inside sources. Sooner or later, PayPal and Venmo will bring easy access to cryptocurrencies to their 325 million active users. This number has increased by 17.3% between Q1 2019 and Q1 2020, implying that PayPal will in fact be bringing crypto to 381 million active users in 2021, 447 million in 2022, and so on.

Given PayPal’s enviable reach, pretty much everyone within the cryptocurrency industry is excited about what the company will do for adoption. None more so than Morgan Creek Digital co-founder/partner Anthony “Pomp” Pompliano.

Source: Twitter

Kraken CEO Jesse Powell is another cheerleader, even if he points out that PayPal’s centralization could be dangerous for a small minority of users.

 

Source: Twitter

The news of PayPal’s development of cryptocurrency services has also led to some bullish price predictions. Technical analyst Lorenzo Stroe predicted that bitcoin will eventually hit $20,000 on the back of PayPal’s support, although the likes of Galaxy Digital’s Mike Novogratz had already predicted $20,000 for BTC by the end of 2020.

Regardless, the consensus view is that PayPal’s move towards selling cryptocurrencies is entirely bullish for bitcoin and crypto in general.

A Boost, But A Modest One

The question is: exactly how much of a difference could PayPal make to crypto adoption or to prices?

As with most questions in life, the answer is: it depends. It’s possible that PayPal may make only a minor difference, yet at the same time, even a minority of PayPal users buying and selling crypto could have positive, longer term ripple effects.

First of all, it’s still not absolutely certain that PayPal will launch crypto services. Similarly, it’s not certain when such services will arrive: nothing has been officially announced, so we could still be waiting for some time.

Secondly, it’s likely that only a portion of PayPal’s 325 million users will actually buy and sell crypto through PayPal (or Venmo). According to a September 2019 poll from YouGov, ‘only’ 18% of adult Americans had purchased crypto in the previous twelve months. An October 2019 survey from Finder.com put the percentage at 14.4%.

Assuming 18% of PayPal users buy crypto, this would work out at 58.5 million people buying crypto through PayPal. It’s not much compared to a global population of seven billion.

On top of this, Bitcoin (and other cryptos) remain hard to scale, and despite becoming less volatile in recent weeks, it still has a reputation for instability. It’s therefore difficult to see millions of extra people flocking to crypto just because of PayPal, unless the Federal Reserve’s massive quantitative easing eventually results in significant inflation.

Lastly, analysis from Messari’s Ryan Watkins has found that PayPal’s user account balances total $23 billion. Assuming that 10% of this is used to purchase bitcoin (an optimistic figure perhaps), this would result in bitcoin’s market cap growing by about $2.3 billion. At the moment, the market cap is $170 billion, implying that if you add the $2.3 billion and then divide by circulating supply (18,433,456 bitcoins), you’ll end up with a bitcoin price of about $9,354.

That said, new money pumped into the bitcoin market doesn’t have this kind of uniform, linear effect on prices. The real liquid supply of bitcoin is about 16 million bitcoins, while bitcoin’s market depth is much lower than $2.3 billion. So $2.3 billion pumped into the market could still have an outsized effect on prices.

Either way, even if PayPal itself doesn’t have a big short- or medium-term impact on crypto adoption and prices, it will undoubtedly make crypto more legitimate. It will introduce more people to crypto, who will introduce more people in turn, and so on. Eventually, crypto will be as mundane and as boring as using a credit card.