Privacy coins are a highly controversial topic in the cryptocurrency space, mainly due to their alleged use in illicit activities. Many investors believe that privacy coins are a great investment due to potential regulatory crackdowns in the near future, but they may be a better investment for your financial freedom than for monetary gain.
Privacy coins, like the name suggests, are cryptocurrencies that allow for fully private transactions to take place. This means that anyone can send money to anyone else in a trustless manner without the sender, receiver, or value of the transaction being known.
The most popular privacy coin is Monero which was released in 2014, making it one of the oldest still-relevant cryptocurrencies. All data about transactions is obfuscated and anonymized through advanced cryptography and privacy-preserving methods, such as ring signatures, stealth addresses, and zero-knowledge proofs. In fact, Monero is so private and secure that the IRS made a $1 million bounty in September 2020 for whoever can figure out a way to trace Monero transactions.
As one might expect, world governments and other regulatory agencies do not like the privacy that Monero and other privacy coins give consumers. As a result, even though Monero is not banned explicitly in most countries, top cryptocurrency exchanges like Coinbase, FTX, and Bithumb have either refused to list or delisted the cryptocurrency. These decisions along with fears surrounding Monero’s liquidity have caused the price to move erratically whenever a delisting announcement is made and has made it slightly less correlated to the prices of other cryptocurrencies.
If the concerns turn out to be valid and governments begin regulating Monero, one of two things will happen. In the first scenario the regulations are so strict that Monero is delisted from all cryptocurrency exchanges and the potential penalties from running a node become too severe for anyone to risk it, meaning the blockchain would be practically dead. This is highly unlikely, as some privacy advocates will undoubtedly continue to mine Monero and validate transactions. In the second scenario, the exclusivity and supply shock caused by Monero not being on exchanges will cause the price of the coin to skyrocket, and it will become a black market commodity. Regardless of which scenario plays out, holding Monero will be valuable since it will allow for private transactions with anyone, and privacy will be at a premium in a world where privacy is less common.
For investors who want to get the potential financial benefits that a privacy coin could offer without the regulatory risks, privacy-optional cryptocurrencies could be the answer. These coins, like Zcash and Horizen, allow users to choose whether or not an individual transaction is private. This flexibility has made exchanges like Coinbase more comfortable listing these coins, and it is less likely that regulators go after them first. Critics of these coins say that they are not truly private since it is not private by default, but their supporters say it is one of the only ways to appease regulators and ensure that their coins are adopted.
Regardless of whether or not the future holds strict regulations for privacy coins and private transactions, private cryptocurrencies could be a strong investment for the average crypto holder’s portfolio. Not only are investors getting the potential benefits that could come from having one of the world’s only truly private digital assets, but they are also protecting themselves from a future in which they are unable to send money without governments or other entities watching and logging the transactions. As long as the privacy cryptocurrencies’ blockchains continue validating transactions, there will be value in these coins and what they offer.
By Lincoln Murr