PayPal (NASDAQ:PYPL) will soon allow you to buy and sell cryptocurrency on its app. The payments company will expand the service to Venmo, and eventually, allow users to use their crypto to make purchases at the over 26 million merchants that accept PayPal. The announcement was viewed as a positive for both PayPal and bitcoin investors.

Here's why there's a lot to like about PayPal's embrace of cryptocurrency.

The PayPal logo in the courtyard of an office building.

Image source: PayPal.

Increased engagement

The ability to buy and sell bitcoin and other cryptocurrencies on PayPal's platform should lead to increased engagement with its services. CEO Dan Schulman wants PayPal to have daily utility, and that starts with getting users to think about it more often.

Rival Square (NYSE:SQ) has successfully increased engagement by adding additional features like bitcoin trading to its Cash App. Management notes that users who take advantage of features like bitcoin trading are also sending more money via its platform, spending more on their Cash Card, and using other monetizable features in Cash App.

PayPal eventually aims to go a step beyond where Square is now by giving users the ability to pay for any purchases using their cryptocurrency holdings. Behind the scenes, the company will actually liquidate the cryptocurrency and send fiat currency to the merchants, but users will be able to store their funds as cryptocurrency up until they want to spend it. The option for such seamless transactions could lead to cryptocurrency fans making more frequent use of PayPal.

The fintech company isn't taking a commission nor looking to earn anything off the spread from those who trade bitcoin on its platform. It can facilitate cryptocurrency trading for free and make its money on the uplift in transactions on its payments network.

Diving deeper into cryptocurrency

Giving people the ability to buy, sell, and use cryptocurrency for payments through PayPal looks like just the first step here. "The shift to digital forms of currencies is inevitable," Schulman said in the press release announcing the new features. The CEO said he wants PayPal to "meaningfully contribute to shaping the role that digital currencies will play in the future of global finance and commerce."

PayPal has been picking up the pace with its introduction of new products and features recently, and it's willing to spend to further its growth. During the company's second-quarter earnings call, CFO John Rainey said it'll spend an additional $300 million in the second half of 2020 "to advance our key priorities and accelerate our growth initiatives."

To that end, PayPal is also exploring the acquisition of cryptocurrency companies. It's reportedly interested in bitcoin custodian BitGo, according to Bloomberg. It's currently partnering with BitGo's competitor Paxos Trust, to enable the purchase and sale of cryptocurrencies.

PayPal may also explore developing its own cryptocurrency. Facebook (NASDAQ:FB) tried to launch a digital currency last year, Libra, in order to facilitate commerce on its social networks. PayPal initially backed the project along with a couple dozen other companies, but it backed away after Facebook started facing regulatory issues with Libra, halting its progress.

A cryptocurrency may make more sense for PayPal. Cryptocurrencies can speed up transactions, particularly cross-border transactions, while reducing their cost. A PayPal cryptocurrency would also reduce its dependence on traditional banking and payments partners.

That could enable PayPal to lower its fees and increase its profit margins. Considering the company facilitates hundreds of billions of dollars in payments every year, even a small margin improvement on them would have a massive impact on its bottom line.

There's a lot of potential for combining the utility of cryptocurrency with PayPal's expansive network of consumers and merchants. With its strong free cash flow, PayPal has the funds to acquire companies in the space and spend money on developing new technology, so it could move fast if it sees good results with the features it just announced.

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