Bitcoin Shortage – Pantera Capital (Blockchain Letter, Nov. 2020)

This article is extracted from Pantera Capital Blockchain Letter, November 2020 and was republished with consent.

In last month’s investor letter we discussed that after 30 months of operation, Square’s Cash App is estimated to be buying around 40% of all newly-issued bitcoin.

PayPal just launched their new service that enables customers to buy, sell, and hold cryptocurrency directly from their PayPal accounts. It’s already having a huge impact.

The bitcoin community is proud to have grown to 100 million users over twelve years. PayPal has 300 million active users. As we’ve argued — and will argue more fully in our December investor letter — this rally is much more sustainable than 2017. One of the main differences is the ease of investing in bitcoin now — via PayPal, Cash App, Robinhood, etc.

Previously the friction to buy bitcoin was pretty onerous: take a selfie with your passport, wait days to a week to get activated, daily limits.

Three hundred million people just got instant access to Bitcoin, Ethereum, and other cryptocurrencies.

BOOM! The results are already apparent.

PayPal’s crypto infrastructure provider is Paxos. Prior to PayPal’s integration of crypto, itBit, the Paxos-run exchange, was doing a fairly constant amount of trading volume — the white line in the chart below.

When PayPal went live, volume started exploding. The increase in itBit volume implies that within four weeks of going live, PayPal is already buying almost 70% of the new supply of bitcoins.

PayPal and Cash App are already buying more than 100% of all newly-issued bitcoins.

The dashed horizontal line in the graphic represents the total supply of newly-issued bitcoins plus the original itBit volume. If their growth persists, PayPal alone would be buying more than all of the newly-issued bitcoin within weeks.

Where would Cash App get their coins? That’s where the finite-supply, inelasticity part comes in: At a higher price.

That is THE story in Bitcoin right now.

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.