The Crypto Adoption Cycle Just Got a PayPal-Powered Nitro Boost

By John Banks October 23, 2020

One of the great wealth-building vehicles of the 20th century was the publicly traded retail franchise. There is a reason why retail franchise stocks, when successful, can deliver multi-thousand-percent returns over a long-term holding period.

With a great franchise — like, say, a casual restaurant concept, or a new type of clothing store — the initial locations are shown to have a profitable business model that attracts customers.

As new locations open up, incoming revenue goes up, which increases the likelihood of expanded profits. The repeat success with new locations, adding to revenue and profits, then justifies a public offering.

When the retail franchise goes public, capital is raised for national expansion. The capital raised enables faster expansion, with even more locations, and the new locations add further to revenue and profits.

As expansion continues, investors become increasingly excited by the ability to invest at a high compound rate of return. Because it is hard to find opportunities where growth is consistent, the company’s stock receives a price-to-earnings “growth multiple,” reflecting the likelihood of compelling future growth, which can be anywhere from 30 to 80 times earnings.

The growth multiple then persists as long as the franchise continues to ramp up.

It is helpful to understand this process because, when you see how it works, you can better understand why money managers are always looking for the next McDonalds, Walmart, Chipotle, or Home Depot.

The chain reaction of attention and profits drawing in more capital, which then increases attention further as profits expand, is a kind of virtuous cycle that can make a stock price go up and to the right, sometimes for years at a time.

Something like this is happening for cryptocurrency as an industry now. The crypto asset space is going from a sort of hypothetical, bleeding-edge opportunity — an opportunity of the future — to an opportunity that is here and now. We are watching it happen before our eyes.

If you have ever wondered what it looks like to observe a world-changing trend in its early stages, and to comprehend what is happening as the trend starts gaining power and speed, on the way to moving up and to the right at a 45 degree angle, this is it.

The crypto space is in a virtuous cycle of self-reinforcing feedback loops, where various events and impacts start to feed on each other:

Investor enthusiasm fuels capital flow into top-tier crypto assets.
World-class companies ramp up crypto-related tech investment.
Expanded retail access to crypto payment rails fuels new enthusiasm.
Companies accelerate crypto adoption via investor encouragement.
Enthusiasm grows and the feedback loop reinforces itself.

In crypto terms specifically, we are seeing retail adoption, corporate acceptance, fintech acceleration, and favorable macro factors all favoring crypto simultaneously.

Take this week’s huge news from PayPal, for example. But before we touch on that news, a quick recap of how serious a player PayPal is:

PayPal is one of the world’s largest and best-known online payment facilitators. Paypal has more than 346 million users, connects with more than 26 million merchants, and has a large enough base of customer deposits that, if PayPal were a traditional bank, by deposit size it would count as the 20th largest bank in the world.

PayPal also owns the Venmo smartphone payment app, which had over 50 million active accounts and processed more than $100 billion worth of peer-to-peer (P2P) transactions in 2019.

On Oct. 21, PayPal announced a new crypto-related service, set to launch in the coming weeks, that will let PayPal users buy, hold, and sell four top-tier cryptocurrencies — Bitcoin, Ethereum, Bitcoin Cash, and Litecoin — via their PayPal accounts.

In even bigger news, PayPal revealed that, in early 2021, PayPal users will be able to use select cryptocurrencies for goods and services purchases in PayPal’s 26-million-strong retailer network.

For years, cryptocurrency as a payment mechanism had two big strikes against it: First, that paying with crypto is too complicated for the average person, and second, that there weren’t enough locations where you could buy stuff with crypto.

PayPal’s entry into the space changes the whole game in that regard. PayPal knows how to make the user transaction experience smooth and simple, because they have already done it for hundreds of millions of users. And by grafting the cryptocurrency option onto an existing network of tens of millions of retailers, the doors are blown wide open in terms of user adoption and ramp-up.

“The shift to digital forms of currencies is inevitable,” said PayPal CEO Dan Schulman in an official statement.

“We are eager to work with central banks and regulators around the world to offer our support, and to meaningfully contribute to shaping the role that digital currencies will play in the future of global finance and commerce,” the statement added.

Some crypto industry observers think PayPal is laying the groundwork for its own cryptocurrency offering, a sort of PayPal-only version of the FaceBook Libra stablecoin concept. PayPal was an original member of the Facebook Libra consortium, but withdrew its membership in October 2019, after the Facebook project took major heat from government regulators.

The thing to understand with PayPal is that the floodgates are opening now. Whether PayPal offers its own cryptocurrency or doesn’t, the key thing is opening up the payment rails.

PayPal’s actions will facilitate cryptocurrency payment rails that can potentially connect hundreds of millions of users with tens of millions of retail merchants.

PayPal will have the ability to make the cryptocurrency transaction process smooth and hassle-free, and may even act as a point of exchange, allowing a PayPal customer to pay in cryptocurrency even as the retail merchant receives fiat currency (because PayPal facilitates the exchange behind the scenes, and turns a profit through trading desk operations).

PayPal’s action here could inspire urgency, even panic, in the traditional banking industry. The traditional banks have to get involved with crypto now. Their business models are under existential threat if they do not.

Look, normal banks are going to get into crypto assets. Within a few years’ time, you will be able to have a crypto account at Wells Fargo or Bank of America and so on, and it will be a normal aspect of merchant banking services for a business to accept crypto-related payments.

The traditional banks will move in the direction of crypto-related services because, if they don’t, PayPal and others will eat their business, and take away their profit margin, in a process by which Silicon Valley “eats” the banking industry via software industry, as an extension of the Marc Andreessen thesis of “software eating the world.”

The U.S. government will not stop this process either. It cannot. Public legislators do not have the political will, or the voter support, to stop an innovative process that adds speed and efficiency to the global payments system. The government will regulate this process, but they will not stop it.

In fact, the groundwork is already laid for traditional banks to start doing crypto-related business.

Look at this news release excerpt from the U.S. Office of the Comptroller of the Currency, released on Sept. 21, 2020, and available here:

“The letter responds to questions regarding the application of stablecoin-related bank activities. It concludes national banks and federal savings associations may hold “reserves” on behalf of customers who issue stablecoins, in situations where the coins are held in hosted wallets.

“The letter addresses the use of stablecoins backed by a single fiat currency on a one-to-one basis where the bank verifies at least daily that reserve account balances meet or exceed the number of the issuer’s outstanding stablecoins.”

The title of the news release sums it up: “Federally Chartered Banks and Thrifts May Engage in Certain Stablecoin Activities.”

This is no longer the far-off future, or even the distant future. It is now. Even as you read this, we suspect high-ranking bank executives are having meetings to discuss what they are going to do to keep from eating PayPal’s dust.

And the more that crypto awareness increases, the more that Bitcoin wins.

Every single bit of ratcheted-up crypto awareness is favorable to Bitcoin because, ultimately, Bitcoin has a non-replicable use case that counts as one of the most important, ever, in the history of mankind: Bitcoin is dematerialized gold. Bitcoin, by nature of its digital design, does the job of gold better than gold itself. And the global Bitcoin network cannot be replicated.

As retail access to cryptocurrency explodes, and as hundreds of millions of users get comfortable with the idea of crypto-related payments, the curious among them will read about Bitcoin as a store of value alternative, and a means of protecting savings from government-induced currency debasement and inflation.

And then, because the payment rails will already be there, courtesy of PayPal and others, these curious retail crypto users will be able to buy some Bitcoin for themselves, in amounts as small as a few dollars — less than the cost of a Starbucks coffee — and keep in their PayPal wallet, or whatever type of crypto wallet they already have.

If you aren’t wildly excited about this, you still aren’t paying attention. As we stated some time ago, this is bigger than all the FANGs put together. And the next stage of breakout acceleration will happen even faster, because the transition in the continuum from physical to virtual is ever more focused on “virtual” now.

We started out talking about the power of the virtuous cycle, and the means by which retail franchise stocks go up and to the right though increased awareness, capital investment, and revenue generation. Well, because this whole crypto phenomenon is digital and software based, a vanguard of the Information Age, it can happen even faster.

In order for Home Depot to expand to nearly 2,000 locations across the United States, it had to actually build all those physical stores, after scouting the locations, buying the real estate, securing the retails, and so on. In contrast, for PayPal to introduce the crypto payment option to 26 million retail outlets in 2021, all it has to do is write some software code and flip a switch.

It gets even better. As you know if you have been reading TradeSmith Daily for any length of time, the governments of the world are on track to spend trillions of dollars in an effort to save their economies from the global pandemic, a Modern Monetary Theory (MMT)-style spending spree of world-historic proportions.

That reality of trillions in unrestrained spending coming, coupled with the threat of a debt-driven deflationary collapse, makes this the most compelling environment for precious metals stocks since the early 1930s.

And at the same time, every trend that is favorable for physical gold — whose market cap in U.S. dollar terms now approaches $10 trillion — is even better for Bitcoin by a potential factor of 10X or even 100X, because Bitcoin is on a one-time, never-to-be-repeated journey from being an asset with a $240 billion market cap to an asset with a multi-trillion market cap.

Given the above, it’s no surprise to hear what Paul Tudor Jones said this week.

Jones, a multi-billionaire, is one of the most successful macro hedge fund managers of all time — he has long been known as “the Michael Jordan of trading” — and also one of the first top-tier global macro hedge fund managers to embrace Bitcoin as an inflation hedge.

“I like bitcoin even more than I did then,” Jones told CNBC this week, referring to his initial bullish Bitcoin call in May 2020. “I think we are in the first inning of bitcoin and it’s got a long way to go,” he added.

Jones believes Bitcoin is the best inflation hedge you can find — better than gold, Treasury Inflation-Protected Securities (TIPS), copper, or yield curve steepener trades — and we agree. It also seems likely an increasing number of corporate treasury departments will start to agree, too, and follow the lead of MicroStrategy and Square by investing a portion of assets in Bitcoin as a hedge against dollar holdings.

In TradeSmith Decoder, we have built a sizable, multi-legged position not just in Bitcoin, but in multiple Bitcoin-related equities, too (equity plays with 10X return potential, or even more).

Our TradeSmith Decoder aim, as always, is to build large, concentrated positions in the world’s most compelling trends — and what’s happening in crypto now certainly qualifies as that.

In many ways the rise of crypto makes perfect sense as a hand-in-hand development alongside the seeding of a new global financial system (with the Nixonian post-Bretton Woods era in twilight) and the dawning of the fourth great age of human civilization (the Information Age).

As a TradeSmith Daily reader, you’ve got a front row seat.