Since the tail end 2021, the crypto market has been in a downward trend. It culminated in a plunge that also impacted traditional markets. Speculation was removed from the market after the recent bust. The shakeup is not the same as in the past. We still have many active users using the Bitcoin network, which is a significant increase from previous cycles. More holders and true believers have made it to the other side. As this happens, Bitcoin (BTC), one of the issues some have about it, may be affecting its adoption. Privacy coins offer an economic incentive as well as utility.
Privacy coins like Monero (XMR), Dash(DASH) or Zcash (ZEC), have performed well in comparison to other altcoins at different times in the first half 2022. Is this a sign that there is a demand for crypto privacy?
The Bitcoin standard is finally here, but not yet.
Let’s assume that Bitcoin created it. Bitcoin is the global dominant currency. Because of the anonymity of the Bitcoin blockchain, anyone can view all transactions for any wallet. For each coffee bought, all of the transactions for that wallet can be viewed. This includes the spending habits and the location of the spend. This is what prompted the creation of Zcash (ZEN), Dash (DCR), Secret(SCRT), Monero (DCR), Secret(SCRT), Horizen (ZEN), and Decred (DCR). Some of these are very similar to Bitcoin. Zcash, which has a 21 million hard limit and works by proof-of work, is very similar to Bitcoin.
It is possible that some of these blockchain protocols could be adopted as the “everyday transactional currency” to complement the Bitcoin standard. Protocols such as Monero or Zcash either have a low inflation rate or have a limited supply. They are based on tokenomics and promise nothing more than to be a medium for exchange and store value. However, they will protect the privacy of their users.
Similar: Privacy loss: Why we must fight to decentralize the future
Bimetallism: What’s it all about and why is it important?
Bimetallism was a concept that existed long before the advent cryptocurrency. Bimetallism, as the name implies, is a system where different precious metals are used to offset each other’s price inflation. To balance out one’s buying power, gold was traditionally accompanied by silver. A horse can be worth either one or ten silver coins (gold and silver are scarce to different degrees, but have different intrinsic utility qualities). The horse may be worth 12 silver coins if it is equal to two gold one year later. This makes the trade more appealing to the silver holder, which in turn puts pressure on the gold price. Bimetallism works when there are two similar means of exchange, such as precious metals. Grisham’s Law was enacted when the state added fiat currency to the mix.
Grisham’s Law says that bad money drives out the good. A holder of fiat or bitcoin will likely value the service less than BTC, and then trade the fiat away, which is potentially inexhaustible. This means that Bitcoin can be left unutilized in wallets for ever, which will destroy some of the value proposition associated with sound, decentralized money. It will not alter the economic laws if we assume the world will move to digital exchanges.
There will be price adjustments for tradable assets. Other assets might be required to keep the price levels of these different mediums under control. If we don’t want to see Grisham’s Law again, other assets may be needed that are similar to Bitcoin but offer a different value proposition. You can also use privacy coins.
Related: DeFi, Bitcoin and Gold: How can investors protect themselves against inflation?
Privacy is important
Bitcoin can be used as a unit, medium of exchange, store value, and other properties that are compatible with the gold 2.0 narrative. The traceability of Bitcoin has many uses. The transparency that allows creditors to be reassured of the existence of funds is a major benefit of Bitcoin-backed loans. Do you want your coffee barista to know that you shop at an antique store every Wednesday? Are you willing to share your financial information with your boss? Or to anyone else who is interested in your payment history.
Bimetallism or “bicryptoism” can help to solve these problems. Bitcoin can be adopted with one or more limited and scarce mediums of exchange (a privacy currency), which will help keep the purchasing power of goods and services in constant “stable fluctuation”. This will be possible in the future, when Bitcoin is the dominant currency worldwide.
These protocols can have different functions, just like gold or silver. Users can use privacy coins to make daily transactions. However, they can also benefit from the decentralized ledger and the blockchain technology. If users wish to send their money to wallets with a public address, they have the option to keep their Bitcoin funds. This can be made easier by functions such as atomic swaps on the chain.
Satoshi Nakamoto (the mysterious inventors of Bitcoin) once said: “For greater privacy it’s best not to use Bitcoin addresses for more than once.” In a world where Bitcoin is the dominant medium of exchange, a new BTC address would be quite impractical for 2022 crypto users. To change Bitcoin’s behavior to allow privacy-enhancing features to be added, users will need to create a Bitcoin Improvement Proposal (BIP). This would allow Bitcoin to co-exist with privacy coins in a “bicryptoism”. This has the added economic benefit of keeping inflationary pressures down over time.
These are only a few thoughts, and the larger crypto community should be thinking about the potential problems as we move forward. The history of Bitcoin and the cryptocurrency revolution was shaped heavily by economics, which should also be an important source of information for the future.
This article is not intended to provide investment advice. Every trade and investment involves risk. Readers should do their research before making any decision.
These views, thoughts, and opinions are solely the author’s and do not necessarily reflect the views or opinions of Cointelegraph.
Michael Tabone works as an economist for Cointelegraph Research. He is a Ph.D. candidate, an engineer, economist, and business strategist. He also offers strategic consulting for firms that focus on the DeFi or blockchain space. Michael co-authored numerous reports for Cointelegraph Research. He also writes a quarterly report on venture capital. His Ph.D. dissertation focuses on DAOs in business and their practical application.