You probably already use Venmo to split the bill at restaurants, but should you use it to buy cryptocurrency?
Users of PayPal-owned Venmo can now use the mobile wallet app to seamlessly buy four major cryptocurrencies: Bitcoin, Ethereum, Litecoin, and Bitcoin Cash — for as little as $1.
This represents yet another step for crypto into the mainstream financial world — Venmo boasts over 70 million users in the U.S. But it’s not a bad deal for Venmo either. According to a 2020 customer survey, 30 percent of the payment app’s customers were already buying cryptocurrency last year through other services. If Venmo can capture even a slice of that market, it could make a killing.
But there’s a catch: the coins you purchase aren’t technically yours. Venmo manages your wallets, so it’s more of an IOU, Asheesh Birla, General Manager at Ripple, the settlement, remittance, and currency exchange (and creators of the cryptocurrency XRP) told CNBC.
“It’s similar to when you deposit U.S. dollars with Bank of America,” Birla said. “You’re trusting that Bank of America actually has your U.S. dollars in their bank accounts, and they’re giving you an IOU.”
On top of that, Venmo charges users high fees to buy or sell crypto.
So should you buy Bitcoin or any other cryptocurrency on Venmo? To find out, I tried it myself.
A fews ago, I bought $10 of Bitcoin (costing me $10.50 after Venmo’s fee). My holdings are worth $10.77 as of writing this thanks to a ~7.7 percent increase in Bitcoin’s value. However, there’s a catch. Venmo charges an additional $0.50 fee to sell. So if I sold my Bitcoin right now, I’d lose money even though the price of the cryptocurrency went up. (Specifically, I’d walk away with $10.27, $.23 less than my initial investment of $10.50).
Of course, that’s a short term perspective. And if there’s one thing crypto fans know, it’s that the longer you hold, the better. But is Venmo the right place to invest? Let’s take a closer look.
CRYPTO-SAVVY is an occasional series from Inverse that explains the world of cryptocurrency and where it’s going next.
Venmo cryptocurrency: Pros and cons
Venmo makes money from its crypto offerings in two ways:
- From the difference between the market price it receives from trading service partner Paxos and the exchange rate between U.S. dollars and a user’s crypto of choice. Or, in plain English, Venmo will likely charge customers slightly more than what it expects to pay Paxos, and pocket the difference.
- By taking a percentage cut each time fiat currency (like the U.S. dollar) is exchanged for a cryptocurrency, and again when users exchange crypto for U.S. Dollars. These fees aren’t cheap: users pay 2.3 percent for transactions under $100 with a $.50 minimum fee. And, as noted, users pay the fee when they both buy and sell cryptocurrency.
This is big business. In an April 2021 note to clients, Deutsche Bank estimated that PayPal’s crypto trading volume will reach $20 billion this year, amounting to an additional $350 million in revenue for the company.
We'll get into more details about the pros and cons of the new service below, but here are a few bullet points:
- It’s accessible, particularly for people new to cryptocurrency
- The service is helping bring crypto to the masses
- Venmo offers a seamless user experience (UX)
- Users can use price fluctuations to trade coins for a profit
- You don’t actually own the cryptocurrency you buy
- You can’t transfer or send the coins to another Venmo account or a third-party crypto wallet
- You can’t use your cryptocurrency to pay for goods or services
- Venmo charges fees to transact (when both buying and selling)
Venmo crypto fees other problems
Traditionally, cryptocurrency wallets are accessed and used via addresses and keys. A public wallet address is, basically, an alphanumeric code that others need to send you coins; the private key gives you control of that wallet (think of them as your bank account number and your PIN).
With Venmo, you don’t have a unique wallet address, just your Venmo username and password. This limitation flies in the face of cryptocurrency as a concept (decentralized money controlled by the user), but Venmo is actually trying to frame this as an advantage. With most cryptocurrency service providers, users need to write down long, alphanumeric wallet addresses and keys, as well as a “seed phrase” (a specific collection of common words, in a particular order) and a complex password.
Venmo claims their offering makes it easier, as a user just needs to remember their Venmo username and password; but in reality, this could also mean that the user (and their assets) are more vulnerable to malicious actors. Storing cryptocurrency (at least long-term) in an inherently vulnerable centralized exchange like Venmo, Coinbase, Binance, and others is a "no-no” for many crypto enthusiasts.
As the adage goes, “Not your keys, not your coins.” So people who are more vigilant with security and where they store their cryptocurrency are not likely to use the service.
Furthermore, PayPal has a history of freezing accounts, even locking out one crypto trader for 180 days after they made approximately 10 crypto transactions in one week (a number apparently exceeding PayPal’s transaction limit).
Currently, Venmo does not permit users to transfer coins out of their accounts (more on this below). For now, it’s sort of like having USD in a bank account and not being able to transfer the dollars to another bank or make a withdrawal at an ATM. (Venmo rival Cash App only offers one crypto, Bitcoin, however, it does enable you to transfer your BTC to a third-party wallet).
In addition, users are unable to use the cryptocurrency they "acquire" on Venmo to buy or sell goods and services, unlike crypto held in private wallets. And as per my personal experience, there is an issue with the fees. With Venmo, there is a cost for buying and selling crypto. As noted above, despite an ~8 percent appreciation in Bitcoin’s value since I bought in, I’d actually lose money if I sold today.
Venmo crypto security and other pros
Despite all this, Venmo's crypto service does have some advantages over traditional exchanges and wallets. With Venmo, the user experience for buying crypto, like the app itself, is easy and provides a seamless and quick process for novice traders to dip their toes into crypto (people who might have been deterred in the past).
It’s a common misconception that buying cryptocurrency is an overly complicated process. Penty of apps already make it relatively easy, but Venmo makes it even easier — at least for popular coins like BTC and ETH.
Another positive feature? Not everyone wants the responsibility of safeguarding their crypto holdings. With Venmo, the company holds the responsibility.
“If you lose the public and private key, you lose your coin.”
“If you lose the public and private key, you lose your coin,” says Ripple's Birla. “If you’re a novice in the crypto space and you’re not comfortable holding your own private and public key, then it might be safer to delegate that access to PayPal.”
Case in point: former Ripple CTO Stefan Thomas lost his private key and, in turn, forfeited more than 7,000 Bitcoin, valued at over $245 million at today’s token price. With Venmo, crypto users would simply click the “Forgot my password” link to regain access to and control of their account and in turn their assets.
Venmo’s crypto offering also allows less tech-savvy investors to profit from the up and down swings inherent to cryptocurrencies. Many day traders use technical analysis and other trading strategies to take advantage of these swings and make profits off minute-to-minute price fluctuations. Venmo provides the tools to do this quickly and easily.
Venmo crypto: Third party wallet transfers?
Despite the limitations in Venmo’s current crypto offerings, BlockTower Capital’s Bucella highlights that, from a business perspective, it makes perfect sense for Venmo’s parent company PayPal.
"It reduces a lot of the Know-Your-Customer (KYC)/anti-money laundering (AML) potential issues that some of the larger players had in managing wallet-to-wallet transfers that are not within their platform,” he told CNBC.
Regulation remains a barrier to entry for crypto service providers. In December, the Treasury Department proposed new KYC requirements that would require companies like PayPal and Coinbase to link user identities to their cryptocurrency wallets, to enable users to be able to send cryptocurrencies from the centralized exchange to their private wallet.
In the future, Venmo says it will permit users to transfer their cryptocurrency off the platform. At Coindesk’s Consensus 2021 conference, PayPal’s Jose Fernandez da Ponte revealed that third-party wallet transfers are coming, but didn’t provide a timeline.
It is different in other jurisdictions. In May, it was revealed that Revolut – which offers over 20 different cryptocurrencies and is characterized as the PayPal of Europe – will allow users to withdraw their coins from the platform to third-party wallets.
So for the moment, buying cryptocurrency on Venmo is a mixed bag at best. Despite some flaws and questionable fees, if you’re just getting started, it’s not a bad place to get comfortable. Then again, until Venmo offers the option to transfer your crypto into another wallet, we wouldn’t recommend investing too much.