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Forget Bitcoin, here’s how I think Facebook’s Libra could kill it

Bitcoin has been on a bull run in 2019, but it’s been slipping back over the past month and today trades at around the $10,000 level.

At its all-time peak it came close to $20,000, and looking at the five-year price chart I’m seeing something typical of investing bubbles. A soaring early peak, then a crash and a partial recovery — and that’s typically followed by one or more diminishing high points until a final collapse.

Yet talk in cryptocurrency circles is now all about an anticipated next wave of investors, who are supposedly going to pile in and push the price up again. I even saw one pundit predicting a Bitcoin rise to more than $350,000 over the next few years.

But there’s only a finite number of people who can make up these mooted waves, and when continuing new interest is the only thing that’s predicted to push the price up, you know for sure you’re in a ‘greater fool’ investing fad — and they all end by running out of new fools. As an investment, Bitcoin has got nothing else going for it, and rational investors will surely come to see it as no more than yet another tulip bulb mania.

Genuine use

But as tulip bulbs do have an actual use (you can grow pretty flowers from them), so does Bitcoin have a plausible use — as a currency and method of payment. But that’s crippled by its volatility, and taking the huge risks of the erratic Bitcoin price just to save a smidgen on banking system costs, or to gain anonymity, seems like madness to me. And even that one valid usage seems likely to be eclipsed by the upcoming new generation of cryptocurrencies, currently heralded by Facebook‘s planned Libra coin.

Libra, intended to be backed by actual financial assets, would be controlled by a partnership that includes the likes of Visa, Mastercard, PayPal, communications companies, blockchain technologists, venture capitalists and more. The key aim would be to provide stability, which is an absolute must for a workable currency.

It’s not going to be a walk in the park, mind, as regulatory bodies are starting to voice concerns. And there’s also the issue of whether we want Facebook, which already has access to a lot of its users’ personal data, to be in charge of their money too.

Cryptos to come

I fully expect the world will see workable, stable, cryptocurrencies. But they’re going to be subject to regulatory authority oversight. And that, I think, could be a twofold killer for Bitcoin. Firstly, with asset-backed and well-supported new cryptocurrencies, there’d be no need to take the Wild West risk that comes with Bitcoin. And secondly, regulatory oversight will come to apply to Bitcoin too.

What should you do if you hold Bitcoin as an investment, and should you buy some if you don’t? My answer to the second question is a big fat no if you’re looking for a rational investment. But if you have some, I say by all means hang on to them — provided you understand you’re gambling, not investing.

For investing, I’m convinced there’s still nothing that comes close to buying shares in top companies and holding them for the long term.

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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. Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Facebook, Mastercard, PayPal Holdings, and Visa. The Motley Fool UK has the following options: short October 2019 $97 calls on PayPal Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.