The cryptocurrency market has been on a downward trajectory since the end of 2021. In early May 2022, it culminated in a crash that hit traditional markets just as hard. The recent crash took some of the speculation out of the market. But the situation is different from the past. There are still many more active users using the Bitcoin network than we have seen in past cycles. Many more headlines and true believers persevered. However, as this increases over time, one of the concerns that some have about bitcoin (BTC) may affect its adoption. There is an economic incentive, not just utility, that privacy coins can offer as a solution.
At different times in the first half of 2022, both in cryptocurrency market rallies and big drops, privacy coins like Monero (XMR), Dash (DASH) and Zcash (ZEC) have performed relatively well against other altcoins. Does this mean that there is an underlying demand for privacy interest in cryptocurrencies?
The Bitcoin Standard Is Finally Here (Well, Not Yet)
For the sake of this discussion, let’s assume bitcoin has made it. Bitcoin is now the dominant currency globally. But due to the pseudo-anonymous nature of the bitcoin blockchain, anyone can see all transactions from each wallet. And for each coffee purchased, lhe shopper’s spending habits, where the spend was made, and all the other dystopian trappings of a 1984-inspired nightmare are a reality. It is this nightmare that has spurred the creation of coins like Monero, Zcash, Dash, Decred (DCR), Secret (SCRT), and Horizen (ZEN), to name a few. Some of them have qualities similar to those of bitcoin. Zcash has a very similar model to bitcoin, with a 21 million hard cap offer and works through proof-of-work.
Could it be impossible for one or two of these blockchain protocols to be adopted as the “everyday” transactional currency to complement the bitcoin standard? Protocols like Monero and Zcash have a shallow inflation rate or limited supply. They act with their tokenomics and promise to do no more than be a medium of exchange and a store of value, aside from, of course, protecting user privacy..
Bimetallism: What is it and why is it important?
Bimetallism is a concept from long ago and predates the advent of cryptocurrencies. As the name suggests, the idea behind bimetallism is that the different types of precious metals would be used to offset the rate of price inflation relative to the other. Traditionally, gold counted on silver and vice versa to balance the other if one started to have too much purchasing power. For example, a horse is worth 1 gold or 10 silver (gold and silver are rare to different degrees, but still have different intrinsic qualities for utility). If the horse is now worth two gold a year later, he may only be worth 12 silver, which makes the trade more palatable to the silver holder, putting pressure on the inflation price of gold. This bimetallism arrangement works in theory when you have similar mediums of exchange, such as two precious metals. When the state introduced fiat currency into the mix, Grisham’s Law kicked in, and with a vengeance.
Grisham’s Law states that bad money drives out good money.. If a holder has fiat money or bitcoin, it is very likely that they will value the good/service less than BTC and exchange fiat money, which has a potentially unlimited supply. This means that bitcoin will sit, unused, in people’s wallets forever, destroying part of the value proposition of sound, decentralized money to the world. If we assume that the world is going to move to digital media of exchange, this will not change the laws of economics.
There will continue to be price level adjustments from things to tradable assets. To maintain control of these different media, alternative assets may be needed. Nevertheless, if we do not want Grisham’s Law to repeat itself, there must be assets similar to bitcoin but that offer a different value proposition. That’s where privacy coins come in.
privacy matters
Bitcoin can be a unit of account, a medium of exchange, a store of value, and other qualities that fit the narrative of gold 2.0. And bitcoin traceability is a nice feature that has its uses. As we now see with bitcoin-backed loans, the transparency of assuring creditors that the funds exist is a huge utility of the chain. But do you want the barista at the cafe to know that you shop at the antique store every Wednesday? Do you want your boss to know your personal finances? Or anyone who cares to review your payment history?
This is where the idea of bimetallism, or “bicryptism,” can step in and solve these problems.. If bitcoin is adopted with one or two different, scarce and limited mediums of exchange (a privacy currency), these can help keep the purchasing power of goods/services in a constant “steady fluctuation” with each other. This is of course in the future when bitcoin is the world’s dominant currency.
Since these different protocols have different properties (just like gold and silver), they can serve different functions in users’ lives.. For daily transactions, users can enjoy the privacy that a private currency can offer, while using all the advantages of a decentralized distributed ledger and blockchain technologies. When users want to transfer their money to wallets that have a public address, they can choose to keep their funds in bitcoin. Perhaps, through features like on-chain atomic swaps, this can be even easier than a decentralized or centralized exchange.
Satoshi Nakamoto, the mysterious inventor(s) of bitcoin, once wrote: “For better privacy, it is better to use bitcoin addresses only once”. A new BTC address for each user would be quite impractical for the cryptocurrency user of 2022, let alone in a world where bitcoin is the standard medium of exchange. Users will have to try to create a bitcoin improvement proposal (BIPfor its acronym in English) for bitcoin to adopt privacy-enhancing features or coexist with options in a “bicryptoism” setup with one or more privacy coins. The latter has additional economic benefits by maintaining inflationary pressures on prices over time.
These are just a few ideas for the future, and the larger cryptocurrency community needs to think about these potential issues as we go.. The economy played a big role in the founding of bitcoin and the cryptocurrency revolution, and should be a great source of information for its future as well.
This article does not contain investment advice or recommendations. All investments and trading involve risk, and readers should do their own research when making a decision.
The views, thoughts and opinions expressed herein are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Michael Tabone is an economist at Cointelegraph Research. A doctoral candidate, engineer, economist, and business strategist, he also provides strategic consulting to companies concentrating on the DeFi and blockchain space. Michael has co-authored several reports for Cointelegraph Research and writes a quarterly venture capitalist report published on Cointelegraph Research Terminal. His doctoral thesis deals with DAOs and their practical applications in the business world.
Keep reading:
Investments in crypto assets are not regulated. They may not be suitable for retail investors and the full amount invested may be lost. The services or products offered are not aimed at or accessible to investors in Spain.