Social media giant Facebook announced in June that it would launch Libra, a new cryptocurrency, in the first half of next year. Users will be able to buy things and send money to other people rapidly, anonymously and with fees of a fraction of a cent, and Facebook says it's targeting the unbanked. So what is Libra? How is it different from other cryptocurrencies? And are there investment opportunities in this new virtual currency?
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Spoiler alert: Libra is designed not to fluctuate much, so investing directly in the cryptocurrency probably won't do much for you. It could face steep opposition in Congress and from governments around the world. Moreover, you shouldn't invest in any cryptocurrency unless you're prepared to lose your entire investment. And although there are some indirect ways to invest in the crypto boom, these, too, are highly speculative. Here's what you need to know:
How is Libra different from Bitcoin? Bitcoin is a virtual currency that has no central governing authority, such as a central bank. Users can buy and sell Bitcoins anonymously and use them to make untraceable purchases. Bitcoin uses blockchain technology--think of a decentralized ledger of transactions shared and maintained across a vast network of computers--that its advocates say makes counterfeiting impossible.
Like Bitcoin, Libra will use blockchain technology and allow users to be anonymous. That's where the similarities end. What makes cryptocurrency problematic as a currency is that its price can swing wildly. Bitcoin, for example, has fluctuated between $1,914 and $19,345 over the past two years. But Libra's value will be tied to a pool of money in the Libra Reserve, which gets its cash from the members of the Libra Association, a Swiss nonprofit that will oversee the cryptocurrency. The association has 28 initial members, including Facebook, Visa and PayPal, as well as a few nonprofit organizations, such as Kiva, a microlender.
Each member kicks in $10 million to the Libra Reserve. The Libra Association could grow to about 100 members, says Morningstar analyst Ali Mogharabi. You will be able to exchange Libras for money in the reserve, which in turn will be invested in various government bonds and currencies. The reserve's owners will pocket the interest from those investments.
In order to use Libras, you'll need a crypto wallet, an app that lets you turn Libras into dollars (and vice versa). Facebook will offer a wallet through a subsidiary, Calibra, which will allow users to send money to anyone with a smartphone and may eventually allow direct purchases. You'll also be able use other wallets currently on the market to store Libras. Calibra will ensure the separation of social media information and financial information, Facebook says.
Why is Facebook creating Libra? In a white paper, Facebook says Libra will help provide basic financial services to people who lack bank accounts. It will also make it easier for people in one country to send money to relatives in another country. With 2.4 billion users, Facebook will have a huge, ready-made pool of potential Libra users, all of whom could use the currency to buy things they see on the social network.
Although Facebook says that data from those who use Libra won't be sold or used for targeted ads, skeptics abound. "They are not rolling out Libra for philanthropic reasons," says Adam Levin, former director of New Jersey's Division of Consumer Affairs and cofounder of Credit.com. "They are trying to find additional ways to scoop up information about people's habits."
Nevertheless, Libra will allow Facebook to diversify itself from advertising revenue. Facilitating payments is a lucrative business. Mastercard, for example, sports a 56.9% operating margin, a measure of profitability that shows how much a company makes on each dollar of sales after paying for wages and materials but before paying interest or tax. "Everyone wants to get into payments, and now it's Facebook's turn," says John Freeman, vice president of stock research at CFRA. And Facebook will also get a slice of interest payments from the Libra Reserve fund.
What are the drawbacks for Facebook? Facebook is already in the crosshairs because of consumer privacy concerns. In July, the Federal Trade Commission approved a $5 billion settlement with Facebook over its privacy practices. Libra will likely add to those worries. Congress has been scrutinizing tech giants such as Facebook, Google and Amazon for possible antitrust practices. The Federal Reserve, Securities and Exchange Commission and the Treasury have expressed concerns.
Since news of Facebook's intention to debut an anonymous payment system, congressional hearing schedules have been filling up fast, and executives are facing a number of potentially grueling appearances on Capitol Hill. "With Facebook exerting such a tremendous amount of influence and power over politics, those writing legislation have a very personal motivation" to limit Facebook's influence, says Freeman.
A broader worry is that the public may not trust Facebook enough to use Libra. All currency, whether crypto or paper, relies on trust for acceptance. Given consumers' concerns about their privacy on Facebook, the public could be slow to accept Libra. And although Bitcoins seem to be unhackable, the wallets that hold them are not, nor are the exchanges that trade them--and once your crypto wallet is hacked, your cryptocurrency is gone forever. (Facebook says it will refund users if their Calibra accounts are compromised and they lose their Libras, but it hasn't shared specifics.)
What effect will Libra have on the rest of the cryptocurrency market? Bitcoin isn't the only cryptocurrency in the world--in fact, there are more than 1,000. After Bitcoin, some of the most widely traded cryptocurrencies include Ethereum, XRP, Litecoin and EOS. All other things being equal, if Libra becomes popular and accepted, it would draw investors away from other cryptocurrencies and push down their prices.
But you shouldn't invest in any of them unless it's with money you're willing to lose. A stock has earnings and dividends behind it; the U.S. Treasury has the vast U.S. military behind it, as well as extensive policing powers. Bitcoin and other cryptos? Nothing. Joseph Stiglitz, recipient of the Nobel Prize in Economics, says Libra doesn't offer much, either. "Why would anyone give Facebook a zero-interest deposit, when they could put their money in an even-safer U.S. Treasury bill or in a money market fund?" he recently wrote in a syndicated column. One answer, of course, is to shield criminal activities because the transactions can't be traced.
But people have made money in Bitcoin. What are the investment opportunities in Libra or other cryptocurrencies? People invest in Bitcoin simply because they hope its price will go up, that the next person will be willing to pay more than they did. This is known on Wall Street as the Greater Fool Theory. Libra's value will be tied to real currency, so there's not as much potential for it to rise or fall dramatically. You're unlikely to become a Libra billionaire, unless you're Mark Zuckerberg.
Several companies do benefit from cryptocurrencies, but the benefits can be fleeting. Bitcoin mining, a process of solving complex math problems to get new Bitcoins and verify transaction ledgers, requires a vast amount of processing power. Stock in Advanced Micro Devices (AMD) has soared 80% this year, in part because its processors are prized for mining Bitcoin. However, application-specific integrated circuits, or ASICs, that are made especially for Bitcoin mining are now preferred. And demand for those chips rises and falls with the price of Bitcoin.
Blockchain technology does have legitimate--and promising--business use. Financial services firms can use blockchain to keep records of complex trades and contracts. Nasdaq, for example, offers a blockchain service through its Nasdaq Financial Framework. Amazon.com offers a service for companies to create their own blockchain services. For now, we think blockchain technology is interesting to watch but not yet something most investors should put their money on.
And what about Facebook (FB)? Morningstar's Mogharabi thinks that Libra won't do much for Facebook's earnings for the next few years. CFRA's Freeman agrees and says investors should be more interested in Facebook Watch, the company's YouTube competitor, which now has 140 million daily views--a fraction of YouTube's typical traffic, but growing. "That's the new thing from Facebook to get excited about," he says.