Reports indicate that PayPal (NASDAQ:PYPL) is leaping to the cryptocurrency pool with both feet. This news broke soon earlier Square (NYSE:SQ) reported enormous revenue growth driven mostly by bitcoin. Proponents of all cryptocurrency (crypto) think this trade medium will gradually supplant cash and card transactions. PayPal expects adding crypto to its own offerings will let it garner much more wallet share. Given PayPal’s considerably bigger user base and exceptional financials, this growth should be a significant concern for Square investors.
Before we get into why crypto might be a major deal for PayPal, let us quickly specify how it functions. Crypto is a phrase representing any digital money which may be transferred directly from 1 proprietor to another via blockchain technology. The trade is decentralized, transparent, stable, and trustworthy.
From the banking system, whenever you make a debit card buy, your data moves from the merchant, to the retailer chip, to a payment system, then into the bank that hastens the trade. A crypto trade would immediately transfer your crypto into the individual or company you’re spending.
Crypto holders utilize various versions of hardware and software pockets and a rising number of exchanges to deposit, withdraw, and exchange crypto at any moment, night or day.
Picture source: Getty Images.
Two rapid comparisons make the crypto concept easier to understand:
Debit cards have largely supplanted cash trades, allowing every payment to be recorded digitally.
Stocks was bought and sold with a certification. Folks had to continue to those certificates and register them over to market the stocks. Now, most stocks are purchased, sold, and stored electronically.
Cryptocurrency is regarded as the next development of cash, enabling users to purchase, sell, and cover each other directly without the necessity for numerous intermediaries. If it comes to the dimensions of this current market, a new Forbes article reported that the cryptocurrency marketplace is estimated to be worth $270 billion. Fortune Business Insights projects the crypto market will grow by just over 11% annually between 2020 and 2027.
It seems that crypto is largely being bought and sold by individuals, as Binance Research found just 7% of crypto assets are held by institutional investors. Financial advisors seem to be picking up on the idea of crypto as a potential investment. A Bitwise survey suggested that only 6% of advisors were recommending crypto for their clients last year, yet this figure is expected to reach 13% during 2020.
PayPal and its subsidiary Venmo have significant name recognition among individual users. Given the size and growth potential of the crypto market, it makes sense for the company to begin offering cryptocurrencies.
Who are the competitors?
The initial information about what crypto PayPal will support is limited. However, looking at what some other companies offer gives us a good idea of what PayPal is up against.
Square Cash App
Buy and sell crypto?
Deposit or withdrawal crypto from an external wallet?
Crypto trading fees?
Members / users
3 million users
1+ million members
30+ million transacting customers
10 million users
Source: Crypto.com, SoFi, Square, and Robinhood. (*Robinhood may pass along fees from exchanges and other intermediaries, but says crypto trading is commission-free)
It bears mentioning that PayPal’s Venmo system ended 2019 with over 52 million users and the pandemic has driven significant user growth among its peers. In addition, PayPal’s total active users last quarter approached 350 million. In order for PayPal to effectively compete against Square and others, it will need to offer the ability to buy and sell crypto, and it should allow deposits and withdrawals to and from external wallets. When the company releases more details, these are key factors for investors to look for.
What’s in it for PayPal?
The simplest explanation for why PayPal would offer crypto is the company is looking to be a one-stop shop for personal finance needs. Venmo is so well-known that to “Venmo” someone has become synonymous with making a payment. In PayPal’s Q2 2020 conference call, CEO Dan Schulman said in the U.S. alone, there were 150 million to 175 million people using a digital wallet from either PayPal or Venmo.
PayPal is also leaning into the trend of touchless payments during the pandemic. Cryptocurrencies fit perfectly, since a crypto payment requires neither card, cash, or physical contact. Square’s Cash App reported that bitcoin revenue jumped 600% yearly in its last quarterly results. PayPal likely believes its brand awareness, and larger user base, will allow the company to attract significant interest in its crypto offerings.
The one negative surrounding Square’s bitcoin business is its razor-thin margins. Last quarter, Square generated a measly $17 million in gross profits on $875 million of bitcoin revenue. However, Square is seeing attachment gains from users who came to the Cash App because of bitcoin. Some of these users have expanded their relationship into more profitable options like direct deposit, the Cash Card, and more. The key difference involving PayPal and Square is that PayPal appears to be able to afford bitcoin’s thin margins.
PayPal generated over $2 billion in free cash flow in the this past three months, whereas Square burned through more than $200 million in cash over that the last six months. In addition, PayPal is sitting on $7.3 billion in net cash and investments, whereas Square has a little over $1 billion. In short, PayPal has more users, better free cash flow, and more net cash on this balance sheet. If PayPal puts its marketing muscle behind its upcoming crypto offering, it looks like Square investors must become worried.