Blockchain technology gets a lot of hype and receives a disproportionate amount of the spotlight whenever cryptocurrency is discussed.

Blockchain is not cryptocurrency, but cryptocurrency is a form of blockchain.

So, what is the difference?

Blockchain, at a basic level, is a decentralized, open ledger that allows data to be implemented but previous records cannot be altered retroactively. It has the potential to be a very disruptive technology, not just for financial services but a whole host of other industries. Businesses in the near-future will use blockchain to create ‘smart contracts’ that are decentralized and irreversible. There is a ton of potential for blockchain and I believe it’s likely to disrupt countless industries over the next five years.

Cryptocurrency uses blockchain technology to create a digital form of currency that fluctuates based on supply and demand.

As of this writing, Bitcoin, the most widely-recognized version of cryptocurrency, is listed around $12,000 after having been traded in excess of $19,000 just two years ago. Some people have gotten rich trading the swings of Bitcoin.

Unfortunately, due to the highly speculative nature of current cryptocurrencies there will be outsized volatility in the value and an unreliable unit of measure in the coin. Therefore, others have or probably will lose if they choose cryptocurrency as an investment strategy.

But all that is about to change.

Welcome Libra

Facebook is poised to introduce Libra, a digital currency backed by actual assets. Unlike other cryptocurrencies which have the perspective of unreliability, Libra would have companies like Visa, Mastercard and PayPal and backing this move which has the capability of stabilizing a digital currency making it easier for the public to accept it as a legitimate source of payment.

Libra has been proposed to be backed by actual reserve assets, a major difference between traditional cryptocurrency. With major tech companies willing to be a part of the digital currency revolution, there’s more to the story than just another cryptocurrency becoming available.

Facebook boasts over 2.38 billion monthly active users, which means there is a built-in society that could accept this alternative form of payment and may see it more legitimately because it comes from a familiar platform similar to acceptance of Apple Pay.

What makes Libra different?

Bitcoin has brought cryptocurrency to the forefront of the news but that doesn’t mean it will be as competitive in the future; Libra might be the next generation upgrade. There were plenty of search engines before Google and more than a handful MP3 players before Apple released the iPod. Someone very well could talk about owning Bitcoin like they reminisce about their MySpace profile.

There are three major issues with Bitcoin and similar digital currency options versus the possibility of Libra:

  • Ease of use – Bitcoin is currently hard to use as a consistent payment option. Most every brick-and-mortar retail outlets do not accept Bitcoin and neither do most e-commerce companies, including the biggest one: Amazon.
  • Volatility - You never know where the value of your current Bitcoin is going to end up by the end of the day so it’s not a reliable store of value.
  • Investment – Bitcoin still has the allusion of being an investment and not a form of currency.

As a digital currency, Libra does have some advantages as it enters the market – mainly, electronic forms of payment are considered normal. In fact, over 25 percent of those between the ages of 18 and 24 have their debit card linked into a mobile wallet or app to make purchases. When paper money isn’t being exchanged and cards aren’t being swiped, it’s much easier to see digital currency as legitimate.

Current digital payment methods such as Venmo and PayPay are tied to traditional banking institutions.  There is a pitch for Libra to provide a means for exchange for large portions of the global population who are underserved/not served by traditional financial institutions or banks. Facebook’s global initiative to provide WiFi access in developing countries proves its willingness to help provide access to money even if it isn’t tied to a financial institution.

The future of digital currency

Initially Libra will be a ‘pass/fail’ for people on Facebook. Time will tell if it will be adopted or fade away as a failed venture. Skeptics might see Libra as another cryptocurrency that may get lost in the mix of the others, but someone has to push forward with this disruptive technology; once upon a time people were hesitant to buy large ticket items on the Internet, now people buy cars online.

Facebook is rolling out Libra in India in 2020 but they are being met with considerable opposition as government officials are debating outlawing blockchain-based currencies entirely because they feel it makes illegal transactions and fraud easier.

As of now, all eyes are on Facebook to see if Libra is accepted and adopted or just another Bitcoin used for speculation. Regardless, blockchain technology will only continue its growth in various industries even if not accepted for widespread digital currency.

PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. This commentary is a matter of opinion and is for informational purposes only. It is not intended as investment advice and does not address or account for individual investor circumstances. Investment decisions should always be made based on the client's specific financial needs, goals and objectives, time horizon and risk tolerance. The statements contained herein are based solely upon the opinions of Telemus Capital, LLC. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice. Information was obtained from third party sources, which we believe to be reliable, but not guaranteed.

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