Facebook’s Libra isn’t the next bitcoin, but you can make money off it anyway

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Image: Reuters/Stephen Lam
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Since Facebook announced its planned Libra currency June 18, the bitcoin market has gone haywire. The original cryptocurrency surged from $9,000 to $11,000 this past week, as investors perceived Facebook’s crypto initiative as a vote of confidence in blockchain-based assets.

Bitcoin’s price has steadily risen since April, and this week, it surpassed $10,000 for the first time in 15 months—dating back to March 2018.

News of the Libra, and its effect on bitcoin, has understandably piqued the interest of crypto speculators, some of whom may be anticipating a Libra boomlet. For investors hoping to cash in on Facebook’s crypto plans, there are two obvious choices: 1) buy Facebook shares or 2) buy Libra—that is, when it becomes available in early 2020.

Cryptocurrency traders, in particular, might think Libra offers an enticing investment opportunity. After all, unlike most of its crypto predecessors, Libra will be backed by actual reserves, in this case, cash and government bonds.

However, while some of the underlying assets are interest bearing instruments, the spoils won’t go to the Libra holders among the general public. Instead, the project’s heavyweight backers—Visa, Mastercard, Uber, and the like—will collect any interest accrued on the reserves through Libra Investment Tokens, which also represent voting power over how the reserves are managed. Meanwhile, Libra users will simply transact using the currency tokens, perhaps gaining—or losing—ever so slightly because of periodic adjustments to the basket of reserves.

Think of it like this: Libra Investment Tokens are like shares in Bank of America, which derive value from expected future cash flows (in the case of Libra, the cash flows are the interest earned on the reserves). But the actual Libra cryptocurrency is like a check, which you can cash at Bank of America but is only worth its face value.

Rather than purchasing Libra, crypto speculators would probably be better off purchasing equity in one of the organizations which will own Libra Investment Tokens. Facebook expects the participant list to grow to 100 or more companies. That said, even investing in one of these corporations because of Libra doesn’t make a lot of sense, because their Libra-related earnings would be negligible. Investors may as well own government bonds directly.

A subtler—and perhaps more volatile bet—would be to buy bitcoin instead. Of course, it’s not backed by any reserves (or any government), but the short-term excitement about the Libra seems to be spilling over. Indeed, Libra could eventually trade alongside bitcoin on crypto exchanges, and considering Facebook’s reach, that may bring millions more people into the bitcoin economy.

For the moment, there isn’t a surefire way to cash in on Libra, but indirect bets could pay off handsomely.