While many investors may not realize it yet, PayPal Holdings, Inc. (PYPL 1.82%) has been steadily laying the groundwork to profit from any future scenario in which cryptocurrencies play a major role in digital payments worldwide. The biggest step, of course, was the company's decision in October 2020 to enable users to buy, hold and sell a handful of cryptos, including Bitcoin (CRYPTO: BTC), directly via the PayPal platform. At the time, the decision was widely hailed as proof that crypto was going mainstream.
Despite a pullback in the broader crypto market this year, PayPal seems determined to march ahead with its decision to embrace the crypto future of digital payments. At this year's World Economic Forum in Switzerland, PayPal was very bullish on the launch of new cryptocurrency and blockchain services.
Where is PayPal now with crypto?
Right now, there are two key components to PayPal's crypto strategy. One of these is the consumer-facing side. By making it possible for users to buy and sell Bitcoin, PayPal (which owns Venmo) is arguably the best on-ramp for everyday people to learn about, explore and experiment with crypto. Many people have a long relationship with PayPal dating back to the first internet boom and have been using PayPal for everything from e-commerce transactions to sending out invoices for their small businesses. Moreover, PayPal has simplified crypto to the point where you don't have to worry about opening new accounts, storing new passwords or creating new digital wallets.
While this transaction activity from consumers might not contribute significantly to bottom-line earnings now, there is a potential indirect psychological effect that's worth noting. In late 2020, Mizuho Securities surveyed 400 early crypto adopters on PayPal and found that a majority of them had more engagement overall than regular users, and were more likely to view PayPal as the center of their digital payment world. In other words, crypto could be the "hook" that attracts digitally savvy users and incentivizes them to use PayPal more often.
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The other key component of the strategy is the merchant-facing side. If PayPal makes it easy for merchants to accept crypto as a form of payment, that could be a game-changer in terms of transaction volume. Just think about all the high-profile luxury brands (including Gucci, Balenciaga and TAG Heuer) that have recently announced they are now accepting crypto payments. Adoption in the luxury, high-end of the market will eventually spill over into other industries, such as travel and automotive. After all, thanks to Elon Musk, it's no longer unthinkable to pay in Bitcoin for a shiny, new $50,000 vehicle.
Is PayPal really committed to crypto?
PayPal appears to be dedicated to the future of digital currencies. In fact, as far back as 2014, PayPal was debating the merits of enabling users to send Bitcoin to each other. PayPal has also invested in blockchain companies, filed blockchain-related patents and partnered with companies like Coinbase Global, Inc. (COIN +4.25%). And, in 2019, PayPal was one of the first companies to join the Libra Association, which pledged to create a new global digital currency built on blockchain technology.
NASDAQ: PYPL
Key Data Points
And that's where things get really interesting, because rumors have been floating around for nearly six months that PayPal is on the cusp of introducing a new stablecoin based on the U.S. dollar called PayPal Coin. In layperson's terms, a stablecoin is a cryptocurrency that is pegged 1:1 to another currency or commodity. This reduces significantly the risk of price volatility for online transactions. Consider a hypothetical case where you have saved $10,000 in crypto for an amazing summer vacation. If you have your money in Bitcoin, you never really know how much your Bitcoin is going to be worth 1 day, 1 week or 1 month from now. But with a stablecoin, you know that your $10,000 in crypto is going to be worth $10,000. Of course, the big caveat here is that the recent meltdown of Terra (LUNA 2.14%) has cast a dark pall over the idea of stablecoins in general.
A new investment thesis for PayPal
If you take a big picture view, the investment thesis for PayPal becomes very exciting. If cryptocurrencies really are the future of online payments and transactions, then PayPal is well-positioned for future growth on a massive, worldwide scale.
