That is outright scam in my view. They never have to hold bitcoin. They may as well sell paypal coin. Robinhood and Revolut do the same thing. If you can't transfer out your bitcoin, you don't have any bitcoin.

They couldn't do that. If they didn't actually have any crypto, in the event of a large scale increase in price combined with a large scale cash out, Paypal would have to eat the difference from buy to sell price. They would lose their shirt. At minimum, Paypal is buying some percentage of the crypto sales in actual crypto to act as a hedge. However, it is more likely they are closer to 1 to 1 backing since they probably believe that there will be large upward movements in the future and they believe they can make money on both the spreads and the actual bitcoin (assuming they ever care to sell it).

They could just as well hedge the "PayPal-Bitcoin" they hand out to their customers with unbacked Bitcoin futures. They don't necessarily have to buy the underlying as long as they can find some other party who's willing to engage in a bet about the future of the Bitcoin price.

Though I must admit that it's doubtful for them to find enough cash to take the other side of this bet, so most likely they have to resort to actual Bitcoin bought from liquid exchanges or OTC.

Bitcoin futures are running at about 25% per annum carry.

They absolutely can find counterparties to take that trade, but it would be much more efficient to trade in the spot markets. The real question is if they have custody operations setup to handle the coin.

I expect they outsource these backend operations to the likes of Coinbase, Gemini, or Fidelity. They probably won't allow customers to transfer their Bitcoin out until they move custody in house, which is no easy task.

You're giving Paypal and Robinhood too much credit. It wouldn't surprise anyone if they both consider themselves "too big to fail" and do not have sufficient crypto to cover themselves. It's easy to imagine the meetings where someone "important" says "That will never happen, end of discussion." and then it turns out they they're wrong and they get bailed out (or not).

These meetings don't exist. Occasionally fraud and negligence happens, but not this casually. People running PayPal-sized companies are neither completely stupid not completely evil. A bit yes, but not this much.

"Too big to fail" - and that's how you increase the supply of BTC without actually doing so I think.

As long as an entity (such as the government) prints money and takes the hit on the spread people will see contracts of BTC as equivalent as BTC w.r.t value. Its basically banking, but since fiat is still the prime currency of legal settlement (not BTC) no one will think its possible to "run the bank" as that entity in the event of a run will pay the difference. BTC is not actually required to settle anything by most countries laws, so actually delivery of BTC isn't guaranteed. This does undermine actual BTC especially if actual BTC is harder to spend - the pseduo-BTC would then have more utility.

In other words BTC could be the same as fiat potentially in the longer term. It will be more transparent of course since it it easier to take delivery of than say gold (or cash but less so), but as long as they don't give you that option in your product that's fine. Even cash is like this with withdrawal limits, and other laws. If fiat was only valued by the actual cash in the economy it would be worth a lot more than it is now btw.

> Paypal would have to eat the difference from buy to sell price.

Why? If they never offer withdrawals then they don't need to worry about that.

If I buy a BTC for $30,000, then later decide to sell it for $47,000, Paypal will lose $17,000 if they didn't actually have a BTC somewhere in their vault.

This is the same idea as bucket shop operations that "trade" stocks with their clients without actually processing trades on any exchange.

When prices are rising, with new buyers available, then a bucket shop can do just fine for themselves. As soon as they have more sellers than buyers, at a price higher than they came in, the shop is the one that has to cover the difference.

If no one can transfer bitcoin out of the PayPal system then the only way for you to sell it for $47,000 is to find someone else on PayPal willing to buy it for that amount (or actually a bit more because of the spread). So PayPal don't lose anything.

Admittedly this doesn't sound right to me, but it's what the parent commenters seem to be saying.

It doesn't work like this. If paypal's customers decide to cash out as a whole, then that means there is a net sell. There won't be enough buyers in paypal to cover the sells. They would need to expose themselves to another market by buying / selling actual bitcoin to be able to float like you describe.

In most financial systems, there has to be a "banker" to make the market, i.e. they have to close the deals when the aggregate buy/sell deals end in surplus or deficits. So Paypal has to close the ending position -- at least that is my understanding.

I assume that they don’t hold the bitcoin but contract out the holding of the coins (or keys) to some 3rd party who specializes. They still make money on the spread and the buy/sell price gouge may be even larger to cover fees of whoever actually holds the crypto. Holdings may not be 1:1 still but it should be some safe amount.

Or maybe even buy more Bitcoin than they need? It seems to have worked out well for Tesla so far.

As Matt Levine pointed out yesterday, a mainstream company can make money by buying Bitcoin and then making an announcement that sounds like they're going to use it. (It doesn't matter whether that plan works out or not, as long as the price of Bitcoin goes up.)

For Paypal, getting their own customers to buy Bitcoin (that they already own) would be a way of hedging, if they're long Bitcoin to begin with.

IMO Tesla tries to get around China currency controls and lets people in China buy Teslas with bitcoin. I guess that is part of the reason why Tesla was hauled in front of the Chinese government recently. It is a good idea if it works out.

I remember seeing Revolut doing that, worse the price of buying Bitcoin was actually much higher than what you could get on other trading exchanges. What a fucking scam. At the time I didn't understand that people were buying Bitcoin only to gamble with it, and I couldn't wrap my head around buying Bitcoin on Revolut without the ability to move these to a different address.

It's not any different than precious metal ETFs.

It is a similar dynamic, but I would be more inclined to trust the ETF.

1) For the metals ETFs I know about, the underlying is held by a bank which is a separate legal vehicle to the ETF. Since the ETF and the bank are both publicly-listed firms, their full-reserve commitments would be regularly audited to a high standard.

2) Brokers participate in risky activity that is unrelated to digital asset trading. This seems like a higher risk profile than a firm that is streamlined to maintain a single ETF.

3) The broker acts as custodian for your digital assets, but not for your shares.

Imagine that you buy a digital asset through your broker and they become insolvent a week later. Assuming your contract gives you no special rights, you would sit on the books as one creditor alongside unpaid vendors and unpaid employees. Years later, you may get back cents in the dollar.

Whereas you would have full and immediate rights to any ETF you had bought through that broker on the same day. They have no influence once it has settled.

For a view on what this looks like from a legal standpoint check out the MtGox collapse https://en.wikipedia.org/wiki/Mt._Gox

When you get paid at the end of the month do you think there is a bloke with a wheelbarrow full of gold, or salt, or even bits of paper running between banks ensuring you get your salary? You've just figured out the entire private banking sector ;)

It’s one thing to do it with fiat currency, because ultimately there’s a central bank involved as the first lender.

With “fractional reserve crypto” all hell seems like it can break loose - much like the pre-central banking era of monetary instability.

That would be illegal. And probably it would be the SEC (ie a regulator that actually does things) who would be making sure that PayPal or Robinhood or whoever aren’t lying.

Not quite to that extreme, but both banks and paypal do the same with fiat too. They make A LOT of money on the exchange from one currency to another at rates that they determine.

Quote from Elon Musk: "If PayPal had executed the plan that I wanted to execute on, I think it would probably be the most valuable company in the world".

Paypal could have become like Alipay/Wechat Pay in China, but it didn't.

..what was the plan?

If I remember correctly, replace money, or at least all banks.

Which plan was that? The one Musk was fired for pushing, i.e. getting them to switch all their infrastructure to Microsoft Windows?

Elon Musk is best ignored.

On which system you run has very little to do with how successful you can get your company.

Lol.. You can't transfer them out??

What's the point of buying them then? Sounds more like a lease thing.

Pretty much. Many want exposure to the price appreciation without having to deal with minutae like custody.

That's how all currency trading works. Why do you think this is unique to Bitcoin or crypto?

More than 95% of "money" in circulation was created in the private banking sector. That's the closest thing to printing money because that's actually what it is.

Paypal is just taking a cut for providing a service. Don't like it? Don't use it.

You can show up at a bank and demand your balance in central bank money aka cash.

The equivalent for Bitcoin would be that Paypal has to send your balance to you on the blockchain. But they do not do that. They will pay you in dollars. How much dollars? However much they like.

> You can show up at a bank and demand your balance in central bank money aka cash.

If everyone would try to do that the system would collapse. The system is built upon the assumption that the vast majority of people don't do that.

When people do do that, it's called a bank run: https://en.wikipedia.org/wiki/Bank_run

This happened to Northern Rock in the UK in 2007. The bank failed and was nationalised as a result.

> You can show up at a bank and demand your balance in central bank money aka cash.

Of course you can. Whether you get it or not is another matter. Have you ever tried it? Do you know anyone who has tried it? Sure, for trivial amounts you can do it. But do you think you can just waltz into your bank and walk out with $50,000 in cash? Good luck.

I did this often. Then I would buy a can of spam. :)

We'll see whether consumers like their offering.

[checking...] It looks like they are doing alright: https://www.coindesk.com/paypal-2020-results-outstanding-fin...

Yes, the cryptocurrency markets are famously rational.

I'm confused, if I buy bitcoin from Paypal, and I want to use that bitcoin to pay for say, Pizza, would Paypal not allow me to do that?

Same with their forex rates. What's new.

MasterCard is only allowing stablecoins. Your insight sounds good, but unrelated to this.

Revolut is pulling the exact same bullshit to a T.

If it weren't such an obvious move I'd say PayPal carbon-copied it from Revolut. Can't wait for the competition to put pressure on them.

Webull does the same thing... 1% spread in both directions I think (2% total). At least Coinbase are honest and charge a fee and don't claim to be fee-free.

But you get the foreign currency! You can take it to a foreign country to spend it in blackjack and hookers.

That looks more like a bucket shop.

this isn't entirely true, PayPal does charge a transaction fee every time you sell or buy

Not when selling or buying crypto.

Not true.

Holla, it is indeed not true. According to the fees section here, they changed it a month ago and added fees on top of the spread:

https://www.paypal.com/us/smarthelp/article/cryptocurrency-o...

crypto you can't move out of a particular broker is just company scrip

It’s company scrip backed by tulip bulbs.