The cryptocurrency landscape has changed significantly since Mark Zuckerberg revealed details of Facebook‘s plans for launching its own Libra Coin.
Bitcoin itself has no tangible backing whatsoever, and it relies on speculative trading for its value — what some call the ‘greater fool’ theory, in which you buy something in the hope that someone else will pay more for it later. In that sense, and with the fact that the quantities of it are limited, it’s similar to gold. Gold has little use other than sitting there and looking shiny. And people buy it simply because… people have always bought it.
But Libra Coin will be backed by hard assets, and a number of big hitters including Visa, Mastercard and PayPal are apparently already lined up.
Reaction
What’s the Bitcoin reaction been? For one thing, the price has been continuing its 2019 bull run, and is approaching the $10,000 level — $9,902 as I write. We can’t know why for sure, but a number of reasons have been suggested.
One is that Facebook’s entry into the market is making cryptocurrency more respectable, and that could well be attracting new punters. But I think that would be missing the very significant difference between Bitcoin and Facebook’s Libra Coin, which is, of course, the backing of the latter by hard assets.
The Bitcoin community doesn’t seem to like Libra Coin too much, perhaps unsurprisingly, as its financial backing model goes against the rebellious ‘no stinking banks or regulation for us’ culture. But if Bitcoin and other unbacked cryptocurrencies are gaining in the wake of Libra Coin, it’s surely for the wrong reasons.
Alternative currency
One thing that hard-backed cryptocurrencies do is take away one of the rational reasons for people investing in Bitcoin, and that’s when they don’t have a reliable national currency. Even if Bitcoin is volatile, it can still be a relatively safe haven if your only alternative is, say, the Venezuelan Bolivar.
One question will surely be whether Libra Coin will be as readily available worldwide as its more ethereal bedfellows, and I can see governments and financial regulators in many parts of the world suffering sleepless nights worrying about how to keep it out. But I don’t see how they can succeed.
Investment
So are cryptocurrencies a good hedge investment, like gold? No, I really don’t think so. But then, I think gold is a lousy investment too.
Gold generates no actual new wealth, and Bitcoin generates no actual new wealth — and in that, at least, they’re the same.
But the world’s companies, doing actual work and making actual things, create new wealth continuously, and I think you’d be mad to eschew them and gamble your investment money on any cryptocurrency even though I’m convinced some backed ones will become valid and useful currencies.
FTSE 100
But for investment, for me it’s always going to be FTSE 100 companies. The UK’s top index is currently offering an overall forecast dividend yield of 4.7%, and that includes no-dividend companies. If you select only the dividend payers, I think it is easily possible to secure 6% returns per year, even before any long-term share price appreciation.
To me, that beats the pants off ‘What might the next fool pay me for this magic thing on the internet?’