Reports suggest that PayPal (PYPL -0.19%) is finally jumping into the cryptocurrency pool with both feet. That news broke shortly before Square (SQ 2.38%) reported massive revenue growth driven primarily by bitcoin. Proponents of cryptocurrency (crypto) believe this transaction medium will eventually supplant cash and card transactions. PayPal hopes adding crypto to its offerings will allow it to garner even more wallet share. Given PayPal's much larger user base and superior financials, this development should be a major worry for Square investors.

Why crypto?

Before we get into why crypto could be a big deal for PayPal, let's quickly define how it works. Crypto is a term representing any virtual currency that can be transferred directly from one owner to another through blockchain technology. The transaction is decentralized, transparent, secure, and reliable.

In the banking system, when you make a debit card purchase, your information moves from the retailer, to the merchant processor, to a payment network, then to the bank that settles the transaction. A crypto transaction would directly transfer your crypto to the person or business you are paying.

Crypto holders use different versions of software and hardware wallets and a growing number of exchanges to deposit, withdraw, and exchange crypto at any time, day or night.

Bitcoin picture

Image source: Getty Images. 

Two quick comparisons make the crypto concept easier to understand:

  1. Debit cards have largely supplanted cash transactions, allowing each payment to be recorded electronically.
  2. Stocks used to be bought and sold using a certificate. Individuals had to hold on to these certificates and sign them over to sell the shares. Today, most stocks are bought, sold, and held electronically.

Cryptocurrency is seen as the next evolution of money, allowing users to buy, sell, and pay each other directly without the need for multiple intermediaries. When it comes to the size of the market, a recent Forbes article reported the cryptocurrency market 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:, 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% annually 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 between PayPal and Square is that PayPal seems to be able to afford bitcoin's thin margins.

PayPal generated over $2 billion in free cash flow in the last three months, whereas Square burned through more than $200 million in cash over 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 the balance sheet. If PayPal puts its marketing muscle behind its upcoming crypto offering, it looks like Square investors should be worried.