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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 tran

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.

liquidify 6y ago
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).
- Mc_Big_G 6y ago
  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).
  - sz4kerto 6y ago
    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.
  - akra 6y ago
    "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.
- hanniabu 6y ago
  > 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.
  - function_seven 6y ago
    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.
    - quietbritishjim 6y ago
      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.
      - liquidify 6y ago
        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.
      - mamborambo 6y ago
        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.
- Slartie 6y ago
  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.
  - oillio 6y ago
    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.
- Hippocrates 6y ago
  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.
- skybrian 6y ago
  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.
  - golem14 6y ago
    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.
gruez 6y ago
It's not any different than precious metal ETFs.
- cturner 6y ago
  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.
  - oillio 6y ago
    For a view on what this looks like from a legal standpoint check out the MtGox collapse https://en.wikipedia.org/wiki/Mt._Gox https://en.wikipedia.org/wiki/Mt._Gox
globular-toast 6y ago
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 ;)
- pbourke 6y ago
  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.
dan-robertson 6y ago
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.
efwfwef 6y ago
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.

liquidify 6y ago

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).

Mc_Big_G 6y ago
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).
- sz4kerto 6y ago
  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.
- akra 6y ago
  "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.
hanniabu 6y ago
> 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.
- function_seven 6y ago
  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.
  - quietbritishjim 6y ago
    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.
    - liquidify 6y ago
      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.
    - mamborambo 6y ago
      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.
Slartie 6y ago
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.
- oillio 6y ago
  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.
Hippocrates 6y ago
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.
skybrian 6y ago
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.
- golem14 6y ago
  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.

gruez 6y ago

It's not any different than precious metal ETFs.

cturner 6y ago
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.
- oillio 6y ago
  For a view on what this looks like from a legal standpoint check out the MtGox collapse https://en.wikipedia.org/wiki/Mt._Gox https://en.wikipedia.org/wiki/Mt._Gox

globular-toast 6y ago

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 ;)

pbourke 6y ago
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.

dan-robertson 6y ago

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.

efwfwef 6y ago

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.