Thousands of different cryptocurrencies exist, and many have captured the interest of investors. For example, Ethereum (ETH +8.16%) has surged nearly 1,100% over the past 12 months, even after the recent crypto market crash.
Spurred by that popularity, PayPal (PYPL +1.16%) recently integrated cryptocurrency into its platform. In other words, investors can gain exposure to crypto without actually buying digital tokens. But which is the better bargain, Ethereum or PayPal?
Ethereum
In 2009, Satoshi Nakamoto created Bitcoin, a decentralized digital currency built on blockchain technology. In this system, miners gather transaction data into blocks, validate each block by solving a cryptographic puzzle, then add the block to the blockchain. This prevents fraud and double spending while governing the creation of new currency (i.e., miners are awarded Bitcoin for each block they solve). And that was the goal Nakamoto outlined in the Bitcoin White Paper: to create a peer-to-peer electronic payments system that eliminates the need for financial institutions like banks.
Image source: Getty Images.
In 2015 the Ethereum blockchain expanded on this idea. Specifically, in addition to storing transaction data, it's also designed to support the execution of computer code. This means the Ethereum blockchain can be used to build smart contracts that power decentralized applications (dapps).
For instance, decentralized financial (DeFi) products allow users to borrow, store, lend, and invest money. Moreover, they offer several benefits compared to traditional financial solutions: Transfers happen more quickly, markets never close, the system is more transparent, and DeFi services are available to anyone with a connected device.
But DeFi applications are just one example. Dapps could also be video games, developer tools, or even a social media platform. But the benefits are the same for each: Once they are deployed, anyone can access decentralized applications, but no one can remove or censor them.
User data is secured by cryptography on the Ethereum blockchain rather than being stored on servers owned by a third party. In essence, Ethereum was built to decentralize the internet.
In this system miners are still required to validate transactions. But transactions on the Ethereum blockchain can execute code, which requires computing power, and that isn't free.
That's where Ether enters the picture. Ether is the currency of the Ethereum blockchain, and it's often compared to gas. Just as your car turns gas into mechanical power, Ethereum turns Ether into computing power.
Therefore, the supply of Ether is unlimited by design. Miners earn a fixed amount of Ether each time they validate a block. This system is disinflationary -- over time the amount of new currency created will decline as a percentage of total Ether. That should slow (but not prevent) inflation. Put another way, as with the U.S. dollar, the purchasing power of Ether should decline as supply expands -- especially if supply outpaces demand.
PayPal
PayPal is a global fintech company that provides payment services to over 392 million users, including 31 million merchants.
Last year, it partnered with Paxos Trust to bring cryptocurrency to the PayPal and Venmo mobile apps, allowing its users to buy, sell, and hold Ethereum, Bitcoin, Bitcoin Cash, and Litecoin.
Image source: PayPal.
However, PayPal made its boldest move more recently, launching Checkout with Crypto, a service that enables consumers to make purchases with digital currencies. Eventually, PayPal plans to offer this checkout option for all of its 31 million merchants. That's a big step toward mainstream acceptance for cryptocurrency, and it's already impacting PayPal's business in a positive way.
Active accounts growth accelerated to 21% in the first quarter of 2021, up from 17% growth in the prior year. And during the Q1 earnings call, CEO Dan Schulman said: "About half of our crypto users open their app every single day." That level of engagement is encouraging. It suggests strong mindshare, which increases the likelihood that those consumers will use other services as well -- like digital payments, QR Code payments, or the Venmo Credit Card.
However, if cryptocurrency disappears tomorrow, PayPal will still have a viable business. Its payments platforms and mobile apps are critical resources for many merchants and consumers, and that has powered strong financial performance over the long term.
|
Metric |
2017 |
Q1 2021 (TTM) |
CAGR |
|---|---|---|---|
|
Revenue |
$13.1 billion |
$22.9 billion |
19% |
|
Free cash flow |
$1.9 billion |
$5.3 billion |
38% |
Source: PayPal SEC filings. TTM: trailing 12 months. CAGR: compound annual growth rate.
As a final thought, PayPal's global network is a significant competitive advantage. Each new consumer adds value for all merchants, and each new merchant creates value for all consumers. Likewise, PayPal's scale and profitability protect its business from rivals, as it can afford to outspend or underprice smaller start-ups. These advantages should make PayPal a relevant player in the digital payments space for many years to come.
The verdict
Both Ethereum and PayPal have compelling qualities, but PayPal is the better long-term investment. Ether tokens were designed to power the Ethereum blockchain, not to increase in value over time.
That doesn't mean the price won't increase in value over time. It could go up tenfold in the next month. But at some point, supply and demand should reach equilibrium, at which time the price should stabilize. After all, the value proposition of decentralized applications is weakened if the currency required to run those dapps is subject to wild volatility.
