In late October 2020, Paypal updated their policy to allow cryptocurrency purchases.
The payments processor also updated their Terms and Conditions to explicitly accommodate cryptocurrency trading.
As such, most of our original text no longer applies.
We've decided to leave the original text untouched for historical purposes, since for the past 11+ years Paypal had been known to disallow and block cryptocurrency purchases (see references at the end of this post).
Every cryptocurrency group or forum probably gets this question 5x a day.
"Where can I buy Bitcoin using Paypal?"
"Where can I buy Litecoin/AVAX/Dogecoin/Unobtainium using Paypal?"
The answer is : there are several OTC markets where you can buy cryptocurrencies using Paypal.
But you should avoid it, if you can.
Paypal is fine as a payments processor but there things you shouldn't buy or sell using it.
For instance: for a long time, digital goods weren't covered under Paypal's buyer protection.
Now they've changed the policy to include "intangible goods" under protection, but each case is considered individually. There is no general policy for intangible goods (probably because they are ... intangible).
When you sell crypto on Paypal, obviously classified as digital goods, the transaction isn't automatically covered by its basic protection.
This lack of protection applies to buying and selling websites, domain names and other intangible assets.
(Don't use Paypal for that. There are several other payment options available for digital goods. Choose a trustworthy escrow service if the transaction amount is high.)
Paypal not only does not automatically protect digital goods' transactions, they actually aren't very sympathetic towards cryptocurrency trading.
Paypal was the first and biggest online payments processor to add restrictions to crypto trading. Not because they're evil, since they're not. But because there is a major fundamental incompatibility between a service like Paypal and crypto.
Cryptocurrencies have irreversible transactions that can't be undone by known human made computer. Once you send crypto to another public key, the transaction is irreversible.
Paypal on the other hand has tons of resources for buyers and sellers to protest transactions. You probably know where this is going.....
Scammers began to use Paypal's buyer and seller protection to steal cryptocurrencies. Since the crypto could not be returned, buyers would then question the Paypal transaction and request a refund. Paypal would grant the refund but the crypto had already been sent. The scammer disappears, the Paypal account gets closed but the crypto had already been sent and there's no way to recover it.
This classic scenario led to most online payment processors to limit cryptocurrency transactions.
Some speculated it was due to competition, which could be a part of the issue. But it was most likely done to avoid future abuse of the system.
Some processors, like LocalBitcoins.com, require a cryptocurrency deposit with at least 3 confirmations before allowing fiat currency trades in its system.
This way the crypto is under LocalBitcoins' custody before trades can happen. There's no way fiat transactions can be reversed in this case. LocalBitcoins acts as an escrow service. This obviously isn't a decentralized solution, but it works well as far as transaction reversal scam protection goes.