You don't own the Bitcoin you buy with PayPal.
Buying bitcoin is easier than ever. But be careful which platform you choose, as it may not own the bitcoins you are buying.
The digital payments company made a big push into cryptocurrencies last year. The platform now allows users in the US to buy, sell, hold, and pay with cryptocurrencies, including bitcoin, ethereum, bitcoin cash, and litecoin. In addition, payPal-owned mobile wallet Venmo also allows customers to buy and sell cryptocurrencies.
You can start by investing as little as $1, and you do not need to open a particular account to trade cryptocurrencies.
But the coins you are buying are not technically yours.
"PayPal manages the wallet, which means it doesn't necessarily have its own bitcoin," said Mike Bukela, general partner at Clocktower Capital.
Typically, when you buy bitcoin, you are given two things to make that ownership official: public and private key pair. The public key is the address of your wallet, and the private key gives you control of that wallet.
With PayPal, you have access to your public address, but the company controls the private key.
In the "Frequently Asked Questions About Cryptocurrencies in PayPal" section of the app, the company states that "the cryptography of your account cannot be transferred to other accounts, whether inside or outside PayPal." This is a limit that seems strange, given that it is a property owned by you.
You can think of an escrow agreement as a type of promissory note for your bitcoins.
Ripple CEO Ashish Birla said, "It is just like you deposit US dollars in Bank of America." "They trust that Bank of America actually has their US dollars in their bank accounts and they are giving them a promissory note."
This means that customers cannot move their bitcoins into cold storage, nor can they transfer tokens to wallets outside the PayPal ecosystem.
Buchla explained that while users are very limited in what they can do with assets, it makes perfect sense for PayPal from a business standpoint.
"This mitigates many of the potential issues of Know Your Customer (KYC) / Anti-Money Laundering (AML) issues that some of the larger players had when managing wallet-to-wallet transfers that are not on their platform."
Not everyone wants the responsibility of protecting their cryptocurrency holdings.
"If you lose the public and private keys, you lose your currency," Birla said. "If you're new to the crypto space and aren't comfortable with your private and public keys, it may be safer to hand that access over to PayPal."
For example, the former CTO of Ripple lost his private key, losing nearly $400 million worth of bitcoin at the current coin price.
PayPal's interface is relatively easy to use.
As soon as the service debuted on PayPal, Bukela tried it out. "It's a very smooth user experience... if I don't plan on doing anything other than buying and holding my bitcoins, and I don't want to protect my crypto, that's understandable." "
If you already have a PayPal account, essentially getting into the crypto game is just clicking a little button below bitcoins that says "Buy."
"There is very little friction," Birla explained. "And if you're going to buy a little bit and rely on PayPal, that's fine."
"People who are concerned about self-custody are clearly not going to use the service," said Mati Greenspan, portfolio manager and founder of Quantum Economics.
Like any centralized exchange, you take on a certain amount of risk.
PayPal has a long history of freezing accounts, very annoying for some users. Centralized exchanges are also inherently vulnerable to threats that can potentially affect entire networks of users.
Mt Gox, once the leading bitcoin exchange, was the first high-profile hack in cryptocurrency history. The exchange went bankrupt and lost 750,000 bitcoins of its users and 100,000 of its own.
"There is no right answer here," said Birla. "It really depends on your use case and your appetite for risk."
Nothing can stop PayPal from changing its mind about the wall it has built around its crypto assets.
Revolut often referred to as the PayPal of Europe, surrendered earlier this week and now allows customers to withdraw bitcoin. "I think there's a lot of potential to play with PayPal as well," Greenspan said.
But regulation remains a barrier to entry.
In December, the Treasury Department proposed new KYC requirements that would require companies such as PayPal and Coinbase to link user identities to their cryptocurrency wallets because they want to send crypto from a centralized exchange to a private wallet.
Birla said, "It is difficult to imagine that PayPal, being more conservative in nature, allows it without some sort of solution to comply with the rules proposed by the United States government."
Buying bitcoins through PayPal is similar to buying a financial contract. However, because you cannot withdraw your coins from the platform, nor can you send them anywhere, it is almost as if you are buying a bitcoin derivative instead of an actual bitcoin.
As with any options contract, the buyer can win or lose a significant amount.
The price of bitcoin hit an all-time high above $63,000 last month, and some analysts say the cryptocurrency still has plenty of room to climb.
CitiFXTechnicals global director Tom Fitzpatrick said charts indicate bitcoin could reach $318,000 by the end of the year, aimed at Citibank institutional clients and in a report obtained by CNBC in December.
The rising cryptocurrency prices could also prove crucial to PayPal's bottom line.
In a note to customers on April 19, Deutsche Bank estimated that PayPal's crypto trading volume would reach $20 billion this year, which equates to an additional $350 million in revenue.
The company makes money by deducting a percentage every time fiat currency is exchanged for cryptocurrency and vice versa. Those fees can be steep. Users pay 2.3% for transactions under $100.
Although PayPal didn't noticeably break out of its cryptocurrency portfolio revenue, the company beat Wall Street's expectations for the first quarter, earning $1.10 billion on $6.03 billion.
Despite the short-term gains, Greenspan warns that cryptocurrencies allow people to bypass PayPal's services. "In short, by embracing it, [PayPal] clearly sees this is the future. But at the end of the day, what they're doing is essentially sowing the seeds of their own doom."
What Did PayPal Announce About Crypto?
PayPal users in the US can buy, sell, hold and pay with cryptocurrencies directly through PayPal using their PayPal Personal or Premier account. Users will be able to find information about crypto and keep track of cryptocurrencies' prices, all without leaving the PayPal application. It is not currently available for business accounts.
A cryptocurrency is a digital or virtual currency created by cryptography. It is not physical and is not issued by the central authority. Instead, it uses a decentralized network and works through a distributed ledger technology called the blockchain.
Which cryptocurrencies does PayPal support?
US (except Hawaii) customers can buy, sell, hold and pay at checkout with four different cryptocurrencies on PayPal: Bitcoin, Ethereum, Litecoin and Bitcoin Cash.
Will it be available globally? When are you planning to release it internationally?
Currently, buying, selling, holding and paying with crypto on PayPal is available in the US (except Hawaii) and US territories. All operations must be performed in USD. We plan to expand this service to select global markets in 2021.
You can find our Terms and Agreements and our Acceptable Use Policy by clicking Legal at the bottom of any PayPal page.
What is the difference between cryptocurrencies?
Bitcoin: Invented by Satoshi Nakamoto in 2009, it is the largest cryptocurrency by value.
Ethereum: Also known as Ether, it is the second-largest cryptocurrency by value. It is a decentralized blockchain with smart contract functionality.
Bitcoin Cash - created in 2017 as a fork of bitcoin, concerns bitcoin's potential to scale. Bitcoin Cash attempts to increase scalability by featuring a larger block size, which increases the number of transactions that can fit in each block.
Litecoin: Created in 2011 by Charlie Lee, Litecoin is a fork of Bitcoin and one of the oldest cryptocurrencies.
Who can buy, sell and hold cryptocurrency?
Individual customers or Premier PayPal Cash and PayPal Cash Plus in the US (excluding Hawaii). It is not currently available for business accounts.
Do I need to register for anything?
For Personal or Premier PayPal Cash and PayPal Cash Plus accounts, you need to confirm certain
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