Q: I've been following the story about Facebook's upcoming cryptocurrency and was wondering what makes it different from bitcoin?
There are currently more than 2,600 different cryptocurrencies, including 14 that have more than $1 billion in total value. One might wonder why we could possibly need another.
First, there's a big fundamental difference between bitcoin, most other leading cryptocurrencies, and Facebook's (NASDAQ: FB) upcoming Libra.
Libra is designed as a so-called stable coin, meaning that its value will be pegged to another currency -- in this case, the U.S. dollar. Facebook's goal is to get 100 partners to each contribute $10 million in funding in order to get a $1 billion reserve pool. In other words, if this happens and there are a billion Libra in circulation, each coin will be worth exactly $1.
This is a sharp contrast to cryptocurrencies like bitcoin, whose values can fluctuate rapidly. In fact, bitcoin lost 17% of its value in the 24 hours before I wrote this.
Second, it's important to point out that there are some stable coins already in existence. Most notably is Tether, a stable coin with nearly $4 billion in total circulating $1-denominated virtual coins.
However, there's no way to readily use Tether and other stable coins to pay for everyday online purchases. That's where Facebook's 2.7 billion unique users, 90 million businesses who have Facebook pages, and the project's numerous partners including Visa, Mastercard, PayPal, Uber, and eBay come in. Widespread consumer adoption and ease of use when it comes to actually buying things could be a big differentiator.
In short, Facebook's Libra cryptocurrency has two key factors that set it apart from other cryptocurrencies. Its value is not going to be volatile, and it could be easily used to make purchases. That's why it isn't just another bitcoin.
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Matthew Frankel, CFP has no position in any of the stocks or cryptocurrencies mentioned. The Motley Fool owns shares of and recommends FB, MA, PYPL, and V. The Motley Fool has the following options: short October 2019 $37 calls on EBAY, long January 2021 $18 calls on EBAY, and short October 2019 $97 calls on PYPL. The Motley Fool recommends EBAY and UBER. The Motley Fool has no position in any of the cryptocurrencies mentioned. The Motley Fool has a disclosure policy.