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Facebook's Libra coin could become a major pain in the wallet for consumers



Facebook

FB, -0.29%

foray in cryptocurrency can mean problems for consumer economics.

On Tuesday, the Social Media Giant published details on how its cryptocurrency, called Libra, will work. Libra will be a "stablecoin" that is linked to the value of other currencies, unlike other cryptographic baskets like bitcoin

BTC, -1

.87%

Consumers using Facebook's Messenger service, WhatsApp or a stand-alone app will access Libra via a digital wallet managed by the new Facebook subsidiary Calibra.

Facebook won Don't run cryptocurrency directly. Calibra will be the founder of the nonprofit Libra Association who will manage the coin with eBay

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Visa

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Mastercard

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PayPal Holdings

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Lift

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Uber

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and Kiva. The value of the wall will be tied to hard assets, including various currencies such as the United States and the euro.

As of next year, Facebook expects consumers to start making actual purchases with Libra even though the number of purchases will be limited. The message is seen as a blessing to other cryptographic curves. Some have suggested that the price of bitcoin

BTCUSD, -0.04%

could quadruple in the coming months.

For consumers, Libra can be less favorable. While cryptocurrency could provide greater access to financial services for many people across the globe, Libra could also translate into large amounts of debt if consumers are not cautious.

Read more: Here's everything Apple doesn't tell you about its new credit card

Removing the Pain

Behavioral economists and psychologists have long said that credit card use makes people use more money than they would otherwise have spent with cash. Research has shown that monetary expenditure – the literal act of transferring bills and coins to another person – triggers the same parts of the brain that treat physical pain.

Credit cards are boringly boring the pain, a reflection of the fact that the transaction feels less prominent, said Dan Ariely, a behavioral economist at Duke University. "With the credit card you don't pay now, you pay later, so it's less prominent," Ariely said. "Since salinity is higher, people feel more pain and pay less."

And then credit cards can encourage overuse because they make money spending less less painful. The relationship between payment method and overuse is not unique to credit cards.

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A 2008 study by New York University Professor Priya Raghubir and the University of Maryland, College Park Professor Joydeep Srivastava tested whether people were approaching other forms of payment similar to how they used credit cards. Their study showed that consumers spent more time getting scrip, a form of securities, rather than money.

& # 39; If people buy Facebook's cryptocurrency, it will increase the distance from the money and cause less pain on payment. & # 39;


-Dan Ariely, Behavioral Economist

Similarly, research has shown that consumers start spending more money when they start using mobile books instead of credit cards or cash.

Cryptocurrency can be seen by consumers as more akin to credit cards than cash, as it may not feel like "actual" money. "If people buy Facebook's crypto competition, it will increase the distance from the money and create less pain on payment," Ariely says.

Similarly, it is still to see how seriously consumers will take Libra. Ariely claimed another factor called "house money effect" could come into play. This theory suggests that people will take more money with money if it doesn't feel like it's theirs – the concept owes its name to casinos, and how people don't hesitate to bet chips like they would if they put real money in it. the place. 19659003] A similar interruption can play with Libra as consumers have to buy or exchange fiat currency for it. "It would, in my view, be Facebook money," said Ariely. "I don't want to think of it as money coming from savings."

See also: Amazon's new credit card could get on fire people with bad credit

Worse, consumer happiness with Libra depends largely on their understanding of how it works. "Consumers who can understand and formulate the exchange rate appropriately look like foreign currencies, will probably continue using cryptocurrency, "says Ben Smith, founder of Cove Financial Planning in Milwaukee, Wis.

Consumers need to know how currency exchange works to understand that when they pay out Libra, it may be worth more or less than when they first bought Libra, depending on how its value has fluctuated.

Consumers who can understand and formulate the exchange rate adequately, as in foreign currency, are likely to continue to use cr yptocurrency in check. & # 39;


-Ben Smith, founder of Cove Financial Planning

Keeping up with Joneses

Consumers can face a triple-whammy thanks to Libra's Facebook connection. Social media has proven to promote spending thanks to the peer pressure it creates. A recent study by Charles Schwab found that 57% of consumers said they were more aware of how friends spent money instead of how they save on social media, while 49% of millennia reported that social media influenced their choice to spend money on experiences.

"The need to" follow the Joneses "has been part of our culture for decades, but it seems that social media and the fear of missing out (FOMO) have increased the pressure to use," Terri Kallsen, CEO Vice President and Chief of Schwab Investor Services, said in the report.

A light spot for consumers in connection with Facebook's cryptocurrency push: People don't trust the social media giant. As a result, the adoption of Libra can be limited. In a survey from 2018 on the staff financing website MagnifyMoney

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91% of respondents said they would not rely on Facebook to handle their payments. And, as it stands, only 21% of the population reported using Messenger Payments.

Facebook shares are 17.05% over the last three months, while the Dow Jones Industrial

DJIA, + 1.35%

and S & P 500

SPX, + 0.97%

is up only 2.33% and 3.36%, respectively.


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