The recent surge in Bitcoin prices has been largely driven by leading fintech giants PayPal and Square. According to a report by Pantera Capital, it appears that PayPal and Square’s CashApp have bought up almost 100% of all the new supply of Bitcoins entering the market each day. Pantera Capital came to this conclusion by analyzing iBit cryptocurrency exchange volume. iBit is run by PayPal’s cryptocurrency brokerage service Paxos.
PayPal in Cryptocurrency Space
PayPal’s move into the cryptocurrency space is especially notable. PayPal has over 300 million active users globally and is the largest fintech firm to facilitate digital currency trading. Square, the payments unicorn headed by Jack Dorsey, enabled crypto trading in mid-2018. Robinhood, the popular stock brokerage unicorn, also entered the cryptocurrency space in 2018.
PayPal’s CEO Daniel Schulman views the company’s move into cryptocurrency as just the beginning of its pursuit of opportunities in the space. The digital payments giant obtained a conditional Bitlicense from the New York State Department of Financial Services (NYSDFS) in October 2020. The conditional Bitlicense enables PayPal users to buy, sell, and hold digital currencies. These currencies include Bitcoin, Ethereum, and Litecoin in their online wallets.
Square Holding Bitcoin as Reserve
Square has indicated that it is holding Bitcoin on its balance sheet as a kind of reserve. The Bitcoin trading business of Square’s CashApp has been a major driver of growth for the company. The revenue generated from Cash App’s Bitcoin segment accounted for 80% of the app’s total revenue figure this year. In the third quarter of 2020, Cash App generated more than $1.63 billion in Bitcoin revenue.
Bitcoin at Record levels
Bitcoin is currently trading at near-record levels. In late November 2020, it was trading at over $19,000 per Bitcoin. After trading as low as $3,867 in March, Bitcoin has gained more than 155% since the start of 2020. Ethereum, another popular cryptocurrency, is up 330% since the beginning of the year. Prices have continued to rally as the end of the year approaches.
Dan Morehead, founder and chief investment officer of Pantera Capital, remarked on the impact of PayPal and Square: “It’s having a significant increase on price. You bring on two corporates that are already buying all of the newly issued Bitcoins—supply and demand says the price has to go up.”
Hedge Funds Jump In
Recent bullish comments by prominent hedge fund managers such as Paul Tudor Jones and Stanley Druckenmiller have added further fuel to the crypto craze. Paul Tudor Jones referred to crypto as “the best inflation hedge” and declared he has almost 2% of his assets invested in the sector. Mutual fund veteran Bill Miller also publicly stated that he is placing a big bet on Bitcoin’s rise.
New Bitcoin Investors
Excitement from new investors is high. According to Chainanalysis, a company that tracks cryptocurrency trends, there have been more than 11.9 million transfers of less than $1,000 of Bitcoin into personal digital wallets. Participation from young, passionate individuals has been especially influential in driving this year’s rally in Bitcoin prices. Adam Nunn, a 30-year-old insurance underwriter from Virginia, captures the positive sentiment driving investors toward the digital currency: “I haven’t approached it like this speculative investment. I think of it more for the long term. We’re just at the starting gate right now.”
Vera Krahmal, a university professor and Bitcoin fund manager, has seen the value of her hedge fund that invests in a portfolio of cryptocurrencies rise 215% so far this year. She states, “We’re really betting on adoption. Bitcoin has a lot of attraction as a store of value and for diversification for portfolios. We also believe that it can play an important role in protecting investments against long-term rising inflationary risks, such as loose monetary policy from central banks.”
Supply of Bitcoin Scarce
According to Dan Morehead, CEO of digital asset hedge fund Pantera Capital: “When other, larger financial institutions follow their lead, the supply scarcity will become even more imbalanced. The only way supply and demand equilibrates is at a higher price.”
Observers of the 2020 rally in cryptocurrency prices note that it is different from the 2017 rally in prices. The ease of investing now as a result of the entry of PayPal, Square’s CashApp, Robinhood, and other widely used fintech platforms into the cryptocurrency space makes this year’s cryptocurrency price rally more likely to endure for the long-term.
Increased crypto acceptance by traditional fund managers and financial institutions is another factor that has made this rally much more sustainable than in 2017. In contrast, 2017’s price surge in Bitcoin and other cryptocurrencies was driven largely by speculation. Bitcoin volatility is significantly lower today than in 2017. This suggests that more sophisticated individual and institutional investors are buying Bitcoin this year. Furthermore, the retail investors that were hit hard by the dramatic price drops in 2018 may have renewed confidence to get back in the game as their memories of past losses have faded.