Should I Use PayPal to Buy Bitcoin?

Date Published
December 13, 2020
Written by
Deniz Saat
Reviewed by

There has been a lot of buzz around Bitcoin in recent months because of Square’s 50 million dollar investment from early October. Additionally, the news of Microstrategy’s Bitcoin purchases totaling 425 million dollars has garnered more positive attention for Bitcoin. On June 22nd, there was speculation that PayPal would eventually support Bitcoin and cryptocurrency purchases. PayPal confirmed the move toward digital asset support on October 21st. With the release of these details, Bitcoin has seen a further increase in price. Dan Schulman (CEO of PayPal) has recently stated that, “The shift to digital forms of currencies is inevitable...”. With plans to roll out cryptocurrency services to the majority of their users within the first half of 2021, PayPal has some ground to make up for when compared to their payment rival, Cash App (subsidiary of Square).

What to expect:

  • The partnership with Paxos Trust Company will allow PayPal to provide crypto purchases and infrastructure for doing so.
  • Bitcoin (BTC), Litecoin (LTC), Ethereum (ETH), and Bitcoin Cash (BCH) will be available to buy, store, and sell within the PayPal wallet.
  • Plans to expand crypto features for PayPal users within the coming weeks. Venmo account holders in the U.S. and select international markets will have the same features available in the first half of 2021.
  • PayPal has been granted a special Bitlicense to operate in New York by the New York State Department of Financial Services (NYDFS).
  • Educational content will be available to help users understand blockchain technology, how digital currencies operate, along with the risks and opportunities involved within the space.
  • Users will be able to use their crypto holdings as a funding source. This is limited to the available 26 million merchants around the world on the PayPal platform.
  • Users will be able to convert crypto to fiat with no incremental cost (possibly a flat fee).
  • No additional charges or set up are required for PayPal merchants.
  • All transactions will be settled in fiat with current rates.
  • Investments in TRM Labs and Cambridge Blockchain for compliance in government regulations.
  • PayPal will possibly acquire more Bitcoin and blockchain related companies to support more features.

What does this mean for Bitcoin?

Overall, it is very good news for Bitcoin. This is the perfect marketing campaign for Bitcoin awareness and continuing to include it in the mainstream conversation. With the credibility behind PayPal’s brand, having Bitcoin be associated as a “product” or feature in the platform’s user interface will expose a large number of people to the idea of “owning” Bitcoin. Unfortunately, users will be unable to hold the private keys or withdraw their Bitcoin from their PayPal accounts. There are of course plans to enable users the capability of withdrawing funds in the future but whether or not they fulfill that obligation is up in the air. It is still a win for Bitcoin at large even though some may disagree, we have to keep in mind that it is still very early in the adoption phase. 

Fortunately, it is also far less likely now that governments (in locations where PayPal operates) will ban the use of Bitcoin and other cryptocurrencies entirely. It would be an odd stipulation to ban the use of Bitcoin but also allow certain companies to provide “Bitcoin” services at the same time. The majority of people in the future are most likely not going to custody their own Bitcoin. Governments will prefer citizens to not hold their Bitcoin keys because it will be easier for them to monitor transactions with the cooperation of PayPal and other companies who decide to custody Bitcoin for their users.

Should I buy Bitcoin with PayPal?

This will depend on your own preferences and situation. If you are comfortable with storing your own Bitcoin, PayPal is most likely not going to be where you make your purchases. For those who are still learning about Bitcoin, be sure to do your own due diligence before buying through PayPal. You may end up wanting to eventually transfer your Bitcoin into a personal hardware wallet in the future. With this route, one should consider using another exchange like Cash App instead.

PayPal versus Cash App

Once PayPal provides cryptocurrency purchases for all of their users, the major difference between PayPal and Cash App would be the custodial aspect. Cash App currently allows users to store their Bitcoin on the app itself just like what PayPal intends to do in the near future. However, Cash App allows their users to withdraw their Bitcoin to a Bitcoin address while PayPal will not. Once a user is able to receive Bitcoin onto an address (that may be stored in a software wallet or personal hardware wallet) the user has full control of how and when they may send their Bitcoin. 

Storing Bitcoin on multiple platforms

There is also the option to have your Bitcoin on multiple exchanges or services if you feel comfortable doing so. Just be aware that there have been multiple exchange hacks and PayPal is also prone to hacks despite its track record. Additionally, There is no guarantee that an exchange or PayPal will reimburse your Bitcoin if such an event were to happen. If they are able to reimburse your lost funds, it is unknown how long that process would take. Since PayPal will not be releasing a withdrawal feature, it may be easier to “reverse” Bitcoin transactions on their platform because those transactions will not be recorded on the blockchain. On the actual Bitcoin network, once a Bitcoin transaction occurs, it is impossible to reverse. 

Also, keep in mind that PayPal will most likely not have a “proof of reserves” where they verify the amount of actual Bitcoin they claim to have. Institutions are more likely to practice fractional reserve banking in order to meet obligations with other institutions. This method of banking allows banks to lend out promissory notes that clients or other institutions may use to claim cash, assets, or commodities (like gold and Bitcoin) while not actually holding the claimed amount. The method assumes that all clients will not withdraw all funds at the same time. With Bitcoin this would be even harder to maintain as the supply is verifiably fixed and all transactions are released publicly on the blockchain. With PayPal’s current transaction process for Bitcoin, the company is not required to hold all of the Bitcoin that each user claims to own. The only way for a user to withdraw funds would be to convert their Bitcoin holdings on the app into fiat and then request the withdrawal to be sent to their personal bank account. In essence, PayPal could avoid a bank run if all of their holdings were kept “digitally” in fiat. This would ultimately make PayPal more money than if they allowed actual Bitcoin withdrawals to occur.

Possible features in the future

  • Withdrawals (even though it would not benefit PayPal’s business model)
  • Sending Bitcoin and other currencies to other users on the PayPal network
  • Additional altcoins

With the news of allowing users to buy Bitcoin, PayPal is providing a free marketing campaign for Bitcoin despite not offering a withdrawal feature. Many people will probably not want the responsibility of managing their own Bitcoin and there is nothing wrong with that as long as users are aware of the risks and benefits of doing so. The spread of Bitcoin ownership will continue to grow whether it is through exposure or owning the asset outright. Any news is good news for Bitcoin and we are all witnessing history in the making with PayPal’s commitment to servicing 346 million users.

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Deniz Saat
Deniz Saat is an IT services specialist and technical writer.

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