With its extraordinary swoop on WhatsApp last week, Facebook proved its stock is not so different from the crypto-currency of the moment, Bitcoin. They can both be used for certain, specific purposes. Neither is backed by a government. Both depend on vast networks of individuals. And their worth reflects demand, which is based on murky fundamentals. The trick: monetize them while they still have value.
Unlike United States dollars, neither Facebook shares nor Bitcoins are an official form of legal tender. But some people are willing to accept them as payment. A prominent example is WhatsApp’s founders and financial backers, who happily exchanged their stakes in the text-messaging start-up for Facebook stock worth $15 billion. Yet Mark Zuckerberg, Facebook’s boss, would have struggled to purchase a coffee with his shares at the German bakery where he and WhatsApp’s chief executive, Jan Koum, appear to have hatched the deal.
Similarly, Bitcoin enjoys no universal acceptance. True, at Bandana’s Bar-B-Q in Coralville, Iowa, the currency will buy a slab of ribs. But it will not get a Big Mac at any of McDonald’s 14,000 outlets in the United States. Bitcoin is not money as most people understand it. There is no Treasury Department controlling its issuance or value. It is backed only by mathematics, and its total stock is limited at 21 million virtual coins.
In that sense, Bitcoin is only as useful as the network of people and businesses that are willing to accept it in exchange for goods and services. It goes without saying that a similar “network effect†underpins Facebook’s entire existence.
There is one big difference. Unlike Bitcoin, Facebook’s share count can expand. Last week, it issued 182 million new shares and 46 million restricted stock units to WhatsApp’s owners, adding some 9 percent to the total of shares outstanding. Such share-printing could undermine the share’s value, just as governments debase their currencies by printing too much money. Of course, Facebook does something - it’s not merely a putative store of value like Bitcoin. So it can grow into its larger equity base.
The risk for Facebook and Bitcoin, respectively, is that someone creates a better social network or decentralized digital currency. History suggests both will happen - innovators almost never retain their dominant positions ad infinitum. Indeed, there are signs this may already be occurring.
So far, Facebook shareholders are happy with their dilution. The stock price rose on the purchase of an upstart with no financial track record on which to judge its future success within Facebook. However, the acquisition makes Mr. Zuckerberg look fearful. Although Facebook’s business is robust today, it seems that it must make big, near-blind wagers on the next big thing, lest it lose its edge.
The fundamental value of Bitcoin is incredibly tricky to pin down. According to The MIT Technology Review, Bitcoin was four times more volatile in 2013 than the average stock, and the dollar-Bitcoin exchange rate was 10 times more volatile than the dollar rate with major currencies like the euro or yen.
What’s not hard to recognize: Bitcoin’s worth has nearly halved since the beginning of December. Whatever the similarities, or differences, between the pseudo-currencies of Facebook shares and Bitcoins are, their values are clearly not fixed. Next to selling them, the wisest course of action would be to capitalize on their value. Mr. Zuckerberg just did that with Facebook stock in the WhatsApp deal.
Rob Cox is editor of Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
