Libra vs. Bitcoin: Comparing the Newest, Boldest Cryptocurrency to the Original
Facebook just announced it would be launching a new cryptocurrency, and the social media powerhouse hopes to turn its 2.7 billion users into customers. The currency, called Libra, is set to launch in the first half of 2020. And it’s a kind of cryptocurrency we haven’t seen. It’s aimed to be a global, digital currency whose value is tethered to several country’s currencies. But while Libra is Facebook’s baby, the company won’t actually have control over it.
It’s a different kind of beast, and perhaps best explained by comparing it with bitcoin, the world’s original cryptocurrency. This is how Libra stacks up against bitcoin, and how the new coin wants to change the world while making bank.
Who Owns Libra
Libra will be developed by Facebook, but Facebook won’t actually control it. Instead, Libra will be governed by the Libra Association, an independent nonprofit organization based in Geneva, Switzerland. Facebook will only get one vote on the board, just like everyone else. The founding members include:
- Bookings Holdings
There are also several venture capital firms, including Andreessen Horowitz, Thrive Capital and Breakthrough Initiatives. And then there are the nonprofit organizations: Creative Destruction Lab, Kiva, Mercy Corps and Women’s World Banking.
Currently 29 members have signed on, but the Libra Association hopes to have 100 members by the time Libra launches. Each member pays a $10 million minimum buy-in, although NGOs are exempt. Each member gets either one vote or 1 percent of the total votes in the council, whichever is greater, regardless of how much they have invested.
The face of Libra as a whole is David Marcus. He was previously the president of PayPal, was the VP of Messaging at Facebook for five years and is the co-creator of Libra. He’s the face of the operation. Of course, Marcus works for Facebook, which means he works for Mark Zuckerberg.
Who Owns Bitcoin
No one owns bitcoin. No one even knows exactly who started Bitcoin. Bitcoin was created by an anonymous person with the claimed name of Satoshi Nakamoto. Nakamoto owns 980,000 bitcoins, but they have not been cashed out.
The first bitcoin block was mined in January 2009.
How Libra Coins Are Created
Libra functions more like PayPal or Venmo and resembles fiat money — legal tender backed by a government — more than Bitcoin and other digital currencies we are used to. Basically, you pay X amount of dollars (or pounds, Swiss francs, etc.) and Y amount of coins are minted and go into your digital wallet, while the fiat money goes into the Libra Reserve. If you cash out the coin, it’s destroyed from the Libra Reserve. The more people use Libra, the bigger the reserve gets.
How Bitcoins Are Created
Bitcoins are created by mining, but there’s a cap: only be 21 million bitcoins will ever exist. Currently over 17.77 million bitcoins are in existence.
Bitcoins are created by mining via computer algorithms, which takes considerable computational power. The process is slow and energy-hungry, but it also provides network security.
Furthermore, every four years, bitcoin mining rewards are halved. This greatly slows down the rate of bitcoin mining; the last bitcoin won’t be mined until 2140.
Back when Bitcoin started, the algorithms were easier to solve. The more people started mining, the more difficult it became. Currently, it’s not cost-effective to mine at home, as the electricity usage would likely outweigh whatever you could mine. Most bitcoins now come from hundreds of dedicated computers running in bitcoin farms, located in areas where electricity is cheap.
How Does Libra Work?
Libra coins can be sent from your digital wallet to another digital wallet anywhere in the world, with virtually no fees (there’s a fee of a fraction of a cent to pay for processing costs). Enter Calibra.
Calibra is a Facebook subsidiary that handles Libra transactions. Facebook says Calibra will be separate from Facebook and will keep your spending and personal information wholly separate, and that “Calibra will not share account information or financial data with Facebook or any third party without customer consent” except for “limited cases” — presumably that means by court order.
Calibra will be integrated into Facebook Messenger and WhatsApp, and also have its own standalone app.
How Does Bitcoin Work?
At their base level, bitcoins are mined and then sold on the crypto market. People buy and sell them as investments, or they can cash them out using other private entities. There’s no one official app, wallet or website for bitcoin, although bitcoin.org and Coinbase have become trusted resources within the community.
How Fast Is Libra?
Libra promises that the Libra blockchain can handle 1,000 transactions per second. For comparison, Visa claims it can handle more than 24,000 transactions per second.
How Fast Is Bitcoin?
Bitcoin handles seven transactions per second, which is why transactions can be slow. Transactions through the Bitcoin blockchain can take hours, days or even weeks. Fees are tied to transaction speed; the more you’re willing to spend on fees when you’re spending bitcoin, the faster the transaction will occur.
However, some of that is changing, at least for smaller transactions, due to the Lightning Network, which is a second-layer network built on top of the main blockchain. The Lightning Network allows for “instant, high-volume micropayments.”
Who Profits from Libra?
Facebook has vowed to keep itself separate from Calibra and not use everything Facebook knows about you to show you targeted ads. In an interview with CNBC, Marcus said that marketing data “is not the way we will monetize” and that they “are going to make strong commitments, notably on privacy, that financial data and social data never comingle.”
Instead, Libra is going to make its money through generating ad revenue on Facebook that the company hopes will increase due to Libra.
Marcus says that Libra will “create a lot of opportunity for more commerce on the platform, more transactions, and those small businesses will be buying more ads because those ads will be more effective” due to the usage of a singular global currency. Marcus says that plan should be more than enough for at least the first few years of Libra. Basically, Facebook is hoping that if enough people and business owners will use Libra, which ultimately leads to users spending more time on Facebook and WhatsApp, which means more money from advertisers.
Another important note: If all goes to plan, Libra will be a global currency, which is an opportunity for Facebook to open up more revenue streams from under-monetized countries.
For example, Facebook makes the majority of its revenue from the U.S. and Canada, where its average revenue per user, including WhatsApp and Instagram, is $34.86. In Europe, individual users generate $10.98 per user, while Asia Pacific region only averages $2.96. And below Asia Pacific is simply categorized as the rest of the world. In countries where users are poorer and do not have access to or the ability to use traditional banks, Libra wants to present itself as a banking solution. Which, theoretically, means a way for those “unbanked” users to move money through Calibra and more time spent on Facebook’s products.
Libra will also make money via interest generated from its reserve. That interest will cover operating and ecosystem costs at first, but after those costs are paid, the reserve will pay out dividends to investors. The bigger and more popular Libra gets, the more money the investors can reap.
Who Profits from Bitcoin?
Since Bitcoin has no real owners, no one person or entity profits from Bitcoin. Instead, many people profit. Here’s a quick overview:
- Investors who buy and sell bitcoin for profit
- Miners, who profit when bitcoins are sold
- Services that facilitate the buying and selling of bitcoins via service fees
- Asset management companies via fees and services
Some people have made a lot of money. Nakamoto’s 980,000 bitcoins are currently worth about $11.5 billion.
How Is Libra Backed?
One of the main selling points of Libra is for it to be a stable digital currency, or “stablecoin.” The company wants all of its users to be able to cash in and cash out of Libra around the globe, so the coin will need to be tethered to a centralized fiat currency. But in Libra’s case, it’s not just one currency, but a mix, or “basket” of them. According to one of its (many) whitepapers, Libra “will be fully backed with a basket of bank deposits and treasuries from high-quality central banks.”
By doing this, the Libra Association can change the balance of its currency basket, effectively stabilizing the scales if a currency loses too much value or becomes overrepresented.
How Is Bitcoin Backed?
Bitcoin has no government backing, and its value is dictated by supply and demand.
Bitcoin is volatile, as it is vulnerable to market speculation and threats of regulation, and it is decentralized. Libra hopes to be a more-stable cryptocurrency by providing a centralized and regulated cryptocurrency.
How Many Libra Coins Will There Be, and How Much Will They Be Worth?
Facebook is still hammering out details, but it’s expected that one Libra will be close to the value of one dollar or one euro.
While nothing is certain, since the Libra Association is looking for 100 members by launch time, expect there to be somewhere around $1 billion in the Libra Reserve.
How Many Bitcoins Are There, and How Much Are They Worth?
Over 17.7 million bitcoins have been mined, and about 1,800 new bitcoins are created each day. Currently, bitcoins are worth nearly $11,000 each. Altogether, there are over $194.7 billion worth of bitcoins in existence.
How Will Libra Be Regulated?
Libra will undergo strict regulatory measures throughout the world. Already, several governments have stated that the new cryptocurrency will have to adhere to their rules, and the United States’ Federal Reserve Chairman, Jerome Powell, has already spoken to Facebook about it.
Marcus has stated that “on and off ramps will be regulated, custodial wallets will be regulated.” Basically, that means everything about buying into, using and cashing out of Libra will adhere to federal or international cryptocurrency regulations.
Libra has its work cut out for it, but it also has Visa and Mastercard on its board, so Libra will have a good shot at knowing what to expect and how to follow the rules.
Is Bitcoin Regulated?
There is no official review board or governing body that oversees bitcoin, although cryptocurrency management firms are overseen by the SEC.
Bitcoin regulation varies from country to country. It is legal in nearly every country, although some have banned it and all cryptocurrencies (like Vietnam, Pakistan and Algeria). Other countries, like China and Iran, restrict finance companies and banks from using any cryptocurrency.
Anonymity and Libra
Marcus said that Libra will also be “pseudo-anonymous.” You won’t have to use your real name to be attached to transactions, but, like bitcoin, the blockchain ledger will be publicly visible. Unlike bitcoin, you will need to submit a government-issued ID and additional verification information to Calibra.
Anonymity and Bitcoin
Bitcoin is pseudo-anonymous, and all transactions are publicly visible via the blockchain ledger. As such, bitcoins can be tracked by authorities, and bitcoins can be put on a blacklist for being involved in illegal activities. It’s like trying to pay with marked bills, only the ink is invisible.
While you can send and receive bitcoin without revealing your identity, everything you do on the blockchain is traceable back to your bitcoin address via the public ledger. But there are ways to mask your identity, like using multiple names and addresses, or using third-party software.
The bottom line: anonymity is not guaranteed, but it can also be hard to track down the person behind the bitcoin if they take precautions. Cashing out bitcoins while remaining anonymous is difficult.
Why Would People Use Libra?
One of the incentives Libra is banking on is its low or virtually absent fees for sending money internationally. Libra is also targeting people who do not have bank accounts, and providing them with an alternative to store their money in Libra, where, ideally, it can be cashed out for physical money in real-life locations. Libra also hopes to provide a stable currency for people in developing countries where currencies are unstable.
To encourage businesses and customers to use Libra coins, the company will be providing incentives. This will likely be discounts on products and free Libra coins, although nothing is official yet.
Why Do People Use Bitcoin?
Bitcoin was created in response to the 2008 financial crisis. Bitcoin’s genesis block — the first block of its block chain — included a hexadecimal code that read: “The Times 03/Jan/2009 Chancellor on the brink of second bailout for banks.” It was in reference to this article from The Times discussing government bailouts for banks in the UK. The driving force behind bitcoin has always been skepticism that the government can and should be in control of money.
Also, cryptocurrencies allow for financial freedom because a third-party merchant is not always necessary. Bitcoins are super secure — so much so that if you lose your private bitcoin key, that bitcoin is completely inaccessible for good. Bitcoin also allows for a greater degree of privacy than traditional banking systems, and the inherent nature of bitcoin protects against fraud.
Bitcoin is also the oldest and most trusted cryptocurrency around. Libra, on the other hand, is new — and it’s created by Facebook, which will leave many users wary about putting their money in a company that has been wracked by privacy scandals. But if the social media giant plays its coins right, Libra will become a big player not just in the world of cryptocurrency, but as a currency recognized around the globe.