Post #91: is bitcoin finally coming out of age

Opinions expressed whether in general or in both on the performance of individual investments and in a wider economic context represent the views of the contributor at the time of preparation.

 Blink and you may have missed it. Bitcoin has been one of the best performing assets in the world year-to-date, up over 80%. Even prior to the announcement last week from PayPal that it would enable cryptocurrencies as a funding source for digital commerce with its 26m merchants, the price of bitcoin had more than doubled from its pre-pandemic level. So, what’s going on? 

 We have argued for some time that the world is going more digital. Correspondingly, the use of cash is declining – and this trend has only accelerated in recent months. It was perhaps inevitable then that there should be a greater role for cryptocurrencies such as bitcoin. The PayPal announcement was arguably a watershed moment. Consider that PayPal has close to 500m users on its platform. By comparison, there are fewer than 25m identifiable holders of bitcoin presently and only 100m unique-identity verified users surveyed across all crypto exchanges (per Protocol). In other words, PayPal has almost five times more users than bitcoin. Their vote of confidence in crypto should therefore be considered as significant, taking alternative digital currencies from simply being an investment asset into something which could – albeit over time – replace Dollars. 

Lest we get too excited, it’s worth reading the small print. Sure, beginning in 2021 PayPal’s US customers will be able to use their cryptocurrency holdings as a funding source to pay at PayPal’s 26m+ merchants. However, users won’t be able to take their cryptocurrencies out of their PayPal accounts once they’ve acquired it, meaning the money effectively lives in the app until it is either sold or used. Further, it can’t be sent to other people. Most notably, merchants on its platform won’t actually receive their payments in crypto – even if they are made this way; they will be converted back to Dollars, and at a notable fee (3% on transactions of less than $100, with a minimum charge of $0.50 for transactions below $25). 

It’s still, of course, very early days. Even if 1 in 10 Central Banks say that they expect to issue their own digital currencies within the next three years (per the Bank of International Settlements), many more significant hurdles than those outlined above need to be overcome (and these may be revised over time). Importantly, crypto payments will need to be linked successfully into a broader transaction network (processors such as Mastercard and Visa potentially have a role to play here), while security, compliance and regulatory protocols need to be standardised. 

Nonetheless, we should still regard the move of PayPal as significant. The reason why is that all currencies – but particularly novel ones such as cryptos – are about trust. Crucially, PayPal has built a very high level of trust with its customer base, having helped many people to have done their first web and/or mobile-based transactions over the last decade and more. When its service is rolled out to international markets (in the first half of 2021 according to PayPal), your author is likely to be among the early adopters – in the name of research if nothing else. 

29 October 2020 

The above does not constitute investment advice and is the sole opinion of the author at the time of publication. Heptagon Capital is an investor in PayPal. The author of this piece has no personal direct investment in the business. Past performance is no guide to future performance and the value of investments and income from them can fall as well as rise.