Libra could harm Bitcoin, and not for the reasons you think

Without meaning any disrespect to Mark Zuckerberg or Facebook in general, it’s would be a reasonable assessment to say that the Libra project hasn’t entirely gone the way that the social media company hoped it would.

When it was first announced, the world was told that it was the cryptocurrency that would take the concept of crypto into the mainstream. A few short months later, and it’s in tatters. Several major backers have pulled out of the project, and Zuckerberg finds himself making frequent trips to Congress to answer the concerns that regulators have about the whole idea.

You might expect that Libra’s struggles would be good for the price of Bitcoin. After all, if Libra were to be successful, it would inevitably eat into Bitcoin’s share of the crypto market. It may be the original and best-known of all the cryptocurrencies that currently exist, but it has nothing like the global brand recognition that Facebook does. If Facebook successfully launched a cryptocurrency, it would be a huge deal. The price would start high, and rise higher more and more people jumped aboard. That would leave Bitcoin languishing behind it. Libra may indeed drag the price of Bitcoin down, but via a route that nobody saw coming.

We’ll start off with a gloomy assessment: Libra is probably doomed. Some of you will rejoice at that news, and some of you will be disappointed, but it seems likely that regulators in the United States will block it at every turn, and ensure that it never sees the light of day. They simply see it as too large a threat to the established financial order, too open to abuse, and too much of a risk to be allowed to go ahead and become a major alternative to regular currencies. Some of their concerns are valid, and some of them smack of protectionism, but they’re in a position to block it, and blocking it is what they seem intent on doing.

The problem with all the scrutiny being directed toward Libra is that it’s been providing a cryptocurrency education to regulators who have, until now, chosen to stay in the dark about what crypto is and how it works. They’ve known it’s there, but they’ve never wanted to know it’s there. It’s a language that they don’t understand, and it’s never quite become big enough for them to give it their full attention. They’re starting to pay attention to it now, and that’s making markets nervous. This week, Bitcoin hit its lowest price point since June, and it’s the current Libra situation in Congress that’s being blamed for the sharp drop.

Volatility is, of course, to be expected in the price of Bitcoin. We all know that investing in any kind of crypto is risky, volatile, and unregulated. At uncertain times, investing in it feels more like playing mobile slots on a website such as Late Casino than buying a financial product. Mobile slots make an excellent analog for investing in Bitcoin; mining-themed slots like ‘Bonanza’ even correlate to the process by which Bitcoin is generated – but investors are expecting something a little better than the odds they’d get playing mobile slots when they’re putting big money into the market. If buyers lose confidence, the price drops. Right now, buyers are losing confidence.

The big fear is that the information that’s being disclosed to Congress is opening the eyes of people on Capitol Hill to the full potential of cryptocurrency, and what cryptocurrency could mean for existing financial institutions if the idea were to truly catch on and become a widely-used alternative for conventional money. Banks would run into difficulty. Stock markets would go into turmoil. The world as they know it would be turned upside down. They don’t want to see that, and so they’ll dig their heels in and do anything they can to prevent it. That means they’re unlikely to stop at merely cutting Libra’s claws.

The more Capitol Hill knows about crypto, the more likely it is to start writing bills and creating legislation. That means greater scrutiny greater, greater restrictions, and ultimately formal regulation. While regulation should never be feared per se – it’s important to have rules in all walks of life – it wouldn’t be unreasonable to assume that such regulations would favour ‘normal’ banks and currencies at the expense of allowing cryptocurrency to grow.

The line that will be used in the press to beat cryptocurrency around the head is that the anonymity of it allows for nefarious deeds to be done without fear of reprisal. Very soon, we expect to see significant political figures say that crypto will be the means by which criminals launder large sums of money. They’ll also link crypto to international terrorism, and say that terrorist enterprises use crypto in order to hide the origins of their money. We know this because Rep. Brad Sherman said it to Mark Zuckerberg during the most recent hearing. Going even further than that, he said that cryptocurrency could only go one of two ways – failing and bankrupting investors, or succeeding and displacing the dollar. He said that neither outcome is acceptable to him, and several of his colleagues agreed with his assessment.

This is where the old adage ‘a little knowledge is a dangerous thing’ rings very true. We know that those are not the only two possible outcomes for cryptocurrency, as do the majority of people who trade or work with cryptocurrency on a daily basis. Lawmakers, however, do not, and nor are they likely to spend the necessary time it would take for them to build up an accurate picture of the issues they’re discussing making laws on. The brighter the spotlight shines on LIbra and crypto in general, the lower prices are likely to become. Pretty soon, all of us may find out just how well we’re able to hold our nerve if prices drop even lower. Libra will never rival Bitcoin in terms of success, but it could yet make it an equal in terms of failure.