It’s easier than ever to purchase bitcoin. You should be cautious about which platform you use, as you might not own the bitcoin you purchase.
- PayPal allows users to invest as low as $1 in Bitcoin using an existing account.
- PayPal accounts cannot have crypto transferred to any other accounts.
The digital payments company made a major push into crypto last year. Now, the platform allows U.S. users to buy, sell and hold cryptocurrencies including bitcoin, bitcoin cash and litecoin. Venmo, a mobile wallet owned by PayPal, also allows customers to buy and sell cryptocurrency.
You can invest as low as $1 and you do not need to open a separate account to trade in crypto coins.
It sounds pretty amazing, right?
However, the coins you are buying are technically not yours.
“PayPal manages your wallets, which means you don’t necessarily have your own bitcoin,” stated Mike Bucella, general Partner at BlockTower Capital.
Keys
You are usually given two keys to officially own bitcoin when you buy it. The public key is your wallet address, and the private key is your private key. The public key is your wallet address. The private key allows you to control that wallet.
PayPal allows you to access your public address but the company has control of the private key.
The company clarifies that crypto cannot be transferred to any other account on or off PayPal in the “Crypto FAQ” section. This is an odd limitation, considering that it is supposed to be an asset you have.
The custodial arrangement can be thought of like an IOU for bitcoin.
Asheeshbirla, Ripple’s general manager, said that it is similar to depositing U.S. Dollars with Bank of America. “You are putting your trust in Bank of America to have your U.S. dollar in their bank accounts and they will give you an IOU.”
Customers can’t transfer their bitcoins to cold storage and they can’t transfer tokens to wallets outside of the PayPal ecosystem.
Bucella stated that although the user has very limited rights to the asset, it is a great business idea for PayPal.
It reduces the Know-Your-Customer (KYC), and anti-money laundering (AML), potential issues that larger players had when managing wallet-to-wallet transfers that aren’t within their platform.
How to store your bitcoin
Fair enough, not everyone is willing to take on the responsibility of protecting their crypto assets.
” If you lose the private and public keys, you lose your coins,” stated Birla. It might be safer to give access to PayPal to a beginner in crypto.
, Ripple’s former Chief Technology Officer, lost his private key and was unable to access the token price at present, resulting in a loss of approximately $400 million in bitcoin.
PayPal’s interface is very simple to use.
Bucella tried it out as soon as the service was available on PayPal. It is quite seamless. If I intend on buying and holding bitcoins, and don’t want custody of my crypto, it makes sense.
You don’t need a PayPal account to play crypto. All you have to do is click the little button that says “Buy” under your bitcoin.
Birla explained that there is very little friction. Birla said, “And if your intention is to purchase just a little, and you trust PayPal that’s okay.”
Mati Greenspan (portfolio manager, founder of Quantum Economics) said that people who are concerned about self custody “are clearly not going to use the service.”
You accept some risk as with any central exchange.
PayPal has a long history of freezing account . This is much to the dismay of some users. Centralized exchanges are also vulnerable to threats that could affect entire networks of users.
Mt. Gox, the once-leading bitcoin exchange, was the victim of the most prominent hack in cryptocurrency history. The bankruptcy of the exchange saw 750,000 bitcoins stolen by its users, and 100,000 of its own.
Birla stated that there is no one right answer. It all depends on the use case and risk appetite.
Changing the rules
PayPal is free to change its mind about its walled garden built around crypto assets.
Revolut, which is often called the PayPal of Europe, has capitulated earlier this year and allows clients to withdraw bitcoin. Greenspan stated, “I believe that it can very likely play out avec PayPal, as well.”
Regulators remain a barrier to entry.
The Treasury Department presented new KYC requirements in December. These would require companies such as PayPal and Coinbase for users to link their identities to their cryptocurrency wallets if they wish to send cryptocurrencies from an exchange to a private one.
Birla stated, “It’s difficult to imagine that PayPal – being more conservative by default – will enable that without having some kind of solution in place that makes it compliant with regulations that are being offered by the U.S government.”
Making a Profit
PayPal is like buying a financial contract. It is almost like you are purchasing a derivative of bitcoin. You can’t delete your coins from the platform and you can’t send them anywhere.
Like any option contract, the buyer can gain or lose quite a bit of money.
Bitcoin’s price hit an all-time high over $63,000 last month. Analysts believe that the cryptocurrency still has plenty of potential to rise.
Global head of CitiFXTechnicals Tom Fitzpatrick said that the charts indicated that bitcoin could reach $318,000 before the end of 2018. This was in a report for Citibank’s institutional clients, which CNBC obtained in December.
PayPal could be affected by the rising prices of cryptocurrency.
Deutsche Bank sent a note to its clients on April 19, estimating that PayPal’s crypto trading volume would reach $20 billion by this year. This will generate an additional $350 Million in revenue.
The company takes a percentage of every fiat exchange for cryptocurrency. These fees can be very high. Users pay 2.3% on transactions below $100
Although PayPal didn’t specifically separate income from its crypto portfolio in Q1 the company beat Wall Street’s expectations, earning $1.10 Billion on revenues of $6.03 Billion.
Greenspan warns that cryptocurrency can be used to bypass PayPal’s services, despite the short-term benefits. They [PayPal] see this as the future and embrace it. They are essentially sowing their own destruction.”
