Can a Delay in Launch of Facebook’s Libra Cause a Crypto Market Crash?

The third quarter of 2019 was largely bearish for crypto traders. Coins like Tron’s TRX, Cardano’s ADA and the Binance coin all managed to fall out of their top 10 slots, with losses of more than 50% each in their value. Even coins like Litecoin (LTC) and Monero (XMR) saw bearish reversals. A late September broad crypto market sell-off led many top performers, including Bitcoin, Ethereum and Ripple, to slide down from their previous price levels. Bitcoin, which had shown huge promise of repeating its late 2017 performance, dipped to trade below the $8,000 levels in October 2019.

Although many reasons can be attributed to this broad market decline, a particular news event had significant effect on crypto prices. It is official now: Facebook’s Libra will not be launched in 2020, as originally planned. A project that was widely regarded as one of the key reasons for Bitcoin’s resurgence in June 2019, is now facing intense scrutiny from banks and regulators, due to privacy concerns. Could this delay in Libra’s launch cause a crypto market crash?

The Relationship Between Libra and Bitcoin

Although Bitcoin and Libra are largely unrelated, the latter affects the sentiment for Bitcoin, especially when it faces hostility. Even before Facebook’s CEO, Mark Zuckerberg, testified before the US Financial Services Committee, on October 23, 2019, BTC dropped as low as 10% to trade at $7,305, its lowest level since May 2019. Following Bitcoin’s cue, Ether and Litecoin also declined 11% and 13%, respectively.

Bitcoin and Libra are considered competitors, with both aiming to become global currencies. Some experts maintain that Libra’s delayed launch is causing people to lose confidence in Bitcoin’s long-term viability. But the fact remains that the two projects are not really alike, right from the underlying technology to their usage.

Transactions on the Bitcoin blockchain are recorded anonymously. The database is maintained by a huge network of computers, on which the public ledger is stored in such a way that it is difficult to tamper with. The Libra blockchain, on the other hand, is permissioned as of now, which means that a few parties will take decisions on adding transactions to the network. An elected association, comprising large institutions with significant voting rights, will control the network.

Also, while Bitcoin is a peer-to-peer payment network, allowing people to exchange money without intermediaries, Libra is aimed more towards cross-border payments. Unlike Bitcoin, Libra is backed by a basket of stable government-backed currencies and assets, which means that it will be affected by the supply of and demand for fiat currencies. Bitcoin supply is fixed and unaffected by market demand, while Libra’s will be created or burned to maintain stable prices in the face of changes in demand.

So, Bitcoin is decentralised, deflationary and volatile, while Libra is centralised, could be regulated and has inflationary pressures.

Can Libra Cause a Market Crash?

If Libra and Bitcoin truly were competitors, Libra’s delay would have caused a crypto market rise. Libra would essentially be a threat to other cryptocurrencies, since with its launch, Bitcoin and other coins would have to improve their scalability, transaction speeds and fees to match up to it. So, a delayed Libra would actually be good for the crypto market.

The recent slump in value is largely due to problems with Bakkt, a trading platform for institutional investors, which has reported lower than expected trading volumes, since its launch. Owned by the Intercontinental Exchange, Bakkt’s platform allows retail traders and institutional investors to swap physically settled Bitcoin futures contracts. But, after its launch, the number of actual traded contracts stood at a mere 72 at the end of the first day, much lower than CME’s cash-settled futures contracts, where traders exchanged 5,000 contracts after its launch in 2017.

Will the Crypto Market Rise Again?

China is one of the players that sets the pace for BTC. When the Chinese President shows positivity towards blockhain, BTC rises in value. This is what happened on October 25, 2019, when President Xi Jinping stressed the importance of technologies like blockchain for China’s development. In fact, it now appears that China will launch its own cryptocurrency, much ahead of Facebook’s ambitious project.

This news led Bitcoin to reach levels of $10,500, from below $8000, in a matter of a few hours. China is a big driver of the global economy, and its positive stance on blockchain will likely be a boost for the cryptocurrency markets. On the other hand, when China’s state media asks investors to stop speculative trading, the value of BTC might fall again.

Also, with the US-China trade war hurting the global economy, investors are losing confidence in major currencies and traditional assets to provide the expected returns. At times like this, cryptocurrencies could become an alternative source of investment.

Recently, the 3-day MACD histogram crossed above the zero level, signalling a bullish trend for Bitcoin in the future. Although a lagging indicator, it has been associated with successful price predictions for Bitcoin in the past. For example, the indicator went above the zero level in October 2017, which was later followed by a huge rise in BTC prices from $7,000 to $20,000. Again, when it fell below zero in January 2018, BTC prices fell from $13,000 to $6,000.

Overall, it can be safely assumed that Facebook’s Libra will not have a profound effect on the cryptocurrency market. Eight of Libra’s original 28 members have already withdrawn from the project, including payment giants like Visa, Mastercard and PayPal. The project has been hit by serious roadblocks and is unlikely to be formally launched at least for the next two years. Other factors need to be looked into while predicting crypto market movements. For instance, the strong possibility of central banks like the European Central Bank (ECB) and the People’s Bank of China moving towards creating their own digital currencies, will affect market momentum.

Another factor is the fake trading volumes, created by BTC whales. This is why traders prefer to adopt strong risk management measures while trading cryptocurrencies.

Reference Links

• https://www.bloomberg.com/news/articles/2019-10-23/bitcoin-slumps-to-june-lows-before-hearings-on-facebook-s-libra
• https://www.forbes.com/sites/billybambrough/2019/09/27/bitcoin-chaos-continues-as-facebooks-mark-zuckerburg-reveals-libra-woes/#467b73811344
• http://blockpitch.org/2019/10/01/bitcoin-just-had-its-worst-week-of-2019/
• https://www.newsbtc.com/2019/09/27/no-a-facebook-libra-delay-would-not-cause-a-crypto-crash/
• https://www.coindesk.com/key-indicator-turns-bullish-as-bitcoin-struggles-to-break-above-10k