Square & PayPal: Catalysing Crypto Adoption

PayPal and Square have recently been positioning themselves as leaders in securing transactions of cryptocurrencies – with the latter being particularly vocal about its involvement.

It’s the right noise to make right now: digital currency asset manager CoinShares estimated that total investor inflows into cryptocurrency funds and products hit $5.6 billion by December 2020, a 6X increase from 2019. Relative to 2019, when total assets under management (AUM) was a little under $2 billion, AUM as of March 16, 2021 was estimated to be $55.8 billion.

But how do PayPal and Square align with global interest in cryptocurrencies? This article will outline their positions and discuss the viability of their ambitions.

Cryptocurencies: A Primer

“Crypto” enthusiasts argue that government intervention and relief measures (bailouts, stimulus packages, etc) often lead to the inherent loss in value of existing currencies (called “fiats”), which translates to loss of purchasing power. The best alternative, thus, would be to invest in tightly-defined cryptocurrencies. The best-known “cryptos” are Bitcoin Core (BTC) and Ethereum (ETH).

Core to every popular cryptocurrency (or network) is the immutable “ledger” of blockchain technology. Network transactions executed during a given period of time are recorded into a file called a “block” – itself a part of the ledger. Each block also holds a reference to the block that preceded it. The level of security via the network’s verification system makes tampering prior transaction data ranges from very difficult to virtually impossible.

The verification system has users typically solving a mathematical problem in the course of validating the legitimacy of each block of transactions. At the dawn of 2020, it was estimated that an average of 10 minutes is required for a miner to be awarded 12.5 (new) BTC.


Note: It is, however, not necessary for an investor to “mine” for a cryptocurrency. They can simply be purchased using “fiat” currency.

The mining is the crux of recent mainstream media outcry over crypto’s “energy wastage”: a large number of users trying to quickly solve/guess a 64-digit number would inevitably amount to substantial power consumption. Every miner’s attempt does not result in BTC being awarded; for every success, there are many, many failed “guesses”.

Now, several enthusiasts argue that BTC and ETH are incomparable. While BTC was created as a transparent and coercion-free alternative to national currencies, ETH was intended to be a ledger technology platform to facilitate immutable programmatic contracts and applications. The underlying currency (Ether) is used to buy computation power to run code written to execute “real-world” agreements (known as smart contracts) in the ledger.

On August 1 2017, Bitcoin “forked” (split into separate networks by consensus) into BTC and Bitcoin Cash (BCH). BCH increased block size to 32MB with a capacity to process up to 60 transactions per second. To further improve on this and in protest over BCH’s frequent protocol changes, Bitcoin Satoshi’s Vision (BSV) forked from BCH on November 15, 2018. BSV made block sizes scalable to 2 GB along with a miniscule fee added to entice enterprises into using BSV without having to wait for verification success – all in line with the stated goals of the August 2008 whitepaper that inspired the Bitcoin network on February 4, 2020.

To keep up with BSV’s disruption, the Lightning Network – a peer-to-peer protocol for transferring currency between users (nodes) without recording to the blockchain – was conceived as a “Layer 2” over BTC (“Layer 1”). Critics point out that this “sidechain” effectively compromises the transparency of the network for the sake of improving integration with commercial applications.

LiteCoin (LTC) was designed to bring parity between the novice user and the deep-pocket miner through a less computationally-intensive “hashing” algorithm than in BTC. As a result, LTC has remained in the Top 6 cryptocurrencies list since its launch in 2011.

All in all, while cryptos have a complicated history, some experts contend that this is less likely a bubble and more likely a shape of things to come in the areas of computing and global currency. The price performances of the major currencies in play over the past year are as follows:</p.

Square: A Maven in the Making

Square (NYSE: SQ) is a financial services specialist owned by Twitter CEO Jack Dorsey which enables merchants to accept card payments via both hardware and point-of-sale software in addition to analytics regarding payments. Over the past one year, it has had a rocky but trending climb up the charts.

Its mobile payment service Cash App has been its flagship product. However, in recent times, while Square reported that cash transactions at its U.S. merchants as a percentage of overall transactions fell from more than 50% in 2015 to around 30% today, the bulk of the company’s revenue this past year – around 56% – came from Bitcoin transactions. Over the past year, revenue from bitcoin was $1.8 billion – a whopping 10X increase over 2019’s revenues in this category.

Cash App charges two fees – a service fee and an additional fee determined by price volatility – for each bitcoin transaction. Like many other exchanges, this is based on a sliding scale dependent on the size of the transaction.

On January 21, 2020, Square’s crypto-dedicated development team, named Square Crypto, unveiled its first product: a development kit for integrating the Lightning Network. Square Crypto also claimed recently that BTC can process over 10,000X as many transactions as they are today with the same total energy consumption. Dave Mullen-Muhr – Partner at Unbounded Capital, the first venture/hedge fund investing in the BSV ecosystem – argues that this is impossible; given BTC’s constraints on transactions, even a 10X increase in transactions for the same energy consumption is unlikely. This could only mean an endorsement for using Lightning Network. Additionally, since each hub on the Lightning Network requires separate infrastructure to comply with stringent record-keeping as licensed Money Transmitter Businesses (as per US law), its energy consumption is unlikely to be less than that of existing infrastructure. To process this much capacity at “Layer 1” with reduced energy consumption, Mullen-Muhr goes on, the only viable option for Bitcoin-forked networks would be BSV.

PayPal: The Facilitator

PayPal (PYPL) had become a veritable synonym for online payment since its 2002 IPO. In 2015, its parent eBay spun it off to its own ticker “PYPL”, following which it has entered the ranks of the Fortune 500.

By the end of 2014, PayPal enabled online vendors to accept Bitcoin via partnerships with Coinbase, BitPay and GoCoin. On October 21, 2020, PayPal publicly entered the crypto market with its new digital asset service allowing users to buy and sell select cryptocurrencies directly through the platform. While currently restricted to the US, this service is expected to be extended to the UK sometime between March and April 2021. Crucially, there are 3 main features:</p.

  • Only BTC, BCH, ETH and LTC are eligible.
  • Cryptoassets cannot be withdrawn off the platform or sent to other wallets
  • Cryptoassets stored on the platform cannot be used to pay merchants or buy goods.

In terms of trends, PYPL shows virtually the exact same trend over the past one year as SQ:

However, Mizuho Securities analyst Don Dolev forecasts that PayPal expects the payment giant’s overall revenue to climb 20% due to cryptoasset transactions alone. Lisa Ellis, analyst at Moffett Nathanson, also predicts that PayPal’s crypto business will contribute up to $600 million to group revenue in 2021.

On April 20, Venmo announced that its users can buy and sell cryptocurrencies with the same set of rules as with PayPal. The only additional rule put in place is that any purchase or sale be worth at least $1.

In Conclusion

On February 10, Mastercard announced that they will start supporting select cryptocurrencies directly on their network. On March 29, Visa announced that it will allow the use of the cryptocurrency USD Coin (USDC) to settle transactions over the Ethereum blockchain on its payment network. USDC is a “stablecoin” whose value is pegged directly to the U.S. dollar.

As of 2020, Square had 30 million monthly active users, of whom 7.5 million use Cash App daily. Venmo, in comparison, had 50 million users in the US and its parent PayPal had 89% audience reach in the country.

Given the size and reach of both Mastercard and Visa in addition to PayPal/Venmo, Square is likely up for a very stiff fight for control over crypto investors’ assets. However, unlike the other three, Square has two significant advantages:

  • The first mover advantage;
  • The beginning of an ecosystem for applications involving BTC in some capacity.

It is perhaps unsurprising that Visa, founded in 1956, continues to hold the traditional view that a “fiat” is the best indicator of value. But recognizing crypto’s effectiveness as a utility asset – via its underlying blockchain – is definitely a win for the crypto space. It is likely that Mastercard – founded in 1966 – would do the same.

The true battle for dominance in the mainstream market would then fall between PayPal and Square. In this regard, Square and PayPal are likely to be evenly matched once PayPal integrates crypto-based facilities in Venmo – an app strongly favoured by a large proportion of Millennials.

However, just like Robinhood – in our coverage of the GameStop imbroglio – was painfully dependent on one source of revenue, so is Square. In areas outside of crypto, PayPal stands head and shoulders over Square in sheer reach and revenue generation.

What drives volume in crypto transactions next would likely be security, choice of cryptoassets and additional value-added services that can be brought to bear. In this aspect, dear reader, your guess regarding the likely winner is as good as mine.

When it comes to expressing convictions on these companies’ fortunes, we offer 3X ETPs in Square (3SQ) and PayPal (3PYP ), a 2X ETP in Visa (VIS2) as well as shorts in Square (SQS) and PayPal (PYPS).

Investors should review our full list of product offerings to determine the kind of factor play that would best serve their portfolios and subscribe to our mailing list to keep abreast of new developments in the range of products and services we have to offer.

Education Series: Single-Stock ETPs

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