Diem the soon to be new cryptocurrency, but will it be worth $20,000 a coin?
Cryptocurrencies are now more attainable and mainstream than ever before, with even China trialing a digital currency, the Digital Yuan. But no introduction would be complete without mentioning Bitcoin and its astronomical rise to front pages and news media darling. Bitcoin uses blockchains, which is where the term cryptocurrency comes from the cryptographic functions, which help in decentralising the currency, and so, there is no reserve bank or underlying assets to back its value. Facebook has attempted to create its own, Diem, and here is why.
The answer- China. Facebook saw from China how virtual payments could work with most Chinese residents living in Big cities using WeChat’s payments service or Alipay ( Alibaba’s payment system). So Facebook decided to get in on the act and created a WhatsApp payment system. If you didn’t know they did, that’s how much it flopped. They scrapped that idea as Western Countries did not behave in much the same way as Asian countries and next attempt on the list is cryptocurrency. This is a way to catch the multi-trillion-dollar payment industry.
Where their proposed cryptocurrency differs is that it has economic value. Bitcoin was based on demand and has no underlying value and hence when the demand and supply vary even slightly, the price fluctuates in wild swings. Diem will have assets composed of Fiat currencies which form the underlying basket of goods that would hedge its value. Goes without saying that US dollar accounts for most composition.
As such, this makes it more stable. Moreover, it cannot be “mined” but bought in much the same way as buying another currency- through an exchange. The exchange is proposed as Facebook entity. You buy a Diem in exchange for Pounds or Dollars. Those Dollars and they put into a reserve which will be managed by the Diem Committee and in essence, maintains a stable currency and a secure one at that.
If you look through charts at how low Bitcoin used to be then, this may be your chance. But be warned, what Facebook is proposing is less a cryptocurrency and more a business that will benefit FaceBook more than anyone else. The Diem Reserve may have billions exchanged for Diem coins, which they can invest. As a reserve, it will be in low-risk Government notes and commercial paper. The proceeds, they say, will go to lowering the cost of fees. Additionally, they control the exchange and more or less control the price. As this won’t be based on Demand and Supply, the price is unlikely to hit bull runs as Facebook will be keen to make it more stable. That does not mean it will not skyrocket, however. Facebook is just very secretive at its potentials or pitfalls.
If you believe in cryptocurrencies, then this may be for you. It’s a proposed cryptocurrency that has economic value. Buy early and hold on for the ride. Investing is a risk.
The Other Side of the coin, however? Facebook could be onto a money-making machine if this is successful, and maybe Facebook shares are attractive?
The reality? Facebook has a number of hurdles to overcome, regulators and central banks being key. If Facebook wants to create a currency that affects the Central Bank’s ability to control inflation, then the end won’t be far.
Facebook has given little in terms of information. But what we know is that there is a big upside for them, with a lucrative business potentially at hand. It may be an opportunity for investors, buy when it starts, and you could do well, but their plans so far seem to want slow progress to big gains. More will come to light, and for now, we only have their white paper to go on.