Investment viability of privacy coins (Monero/Zcash)?

[idegani]

My question relates to the long-term investment potential of privacy coins such as Monero/Zcash/Zcoin. At present, I don't see how they have a durable future due to government intervention.

There are a lot of posts about how governments can regulate or ban privacy coins, etc. However, I haven't heard much around the simpler and straightforward route to destroying these currencies: just quietly manipulate them. Gold has remained flat over the last 10 years (annualized inflation-adjusted return of 1.4% 2008-2018), despite massive levels of worldwide quantitative easing. If central banks can influence the price of a $7 trillion commodity, what hope does a currency like Monero have with only a $1.8 billion market cap?

The Fed could decide tomorrow that they don't want anyone making untraceable profits on Monero. They would just have to short the currency at key inflection points to eliminate price appreciation and make it painfully volatile. Unlike public ledger currencies, no one would have a clue where the volatility and price gouging is coming from. Even a small $100 million short could move the $1.8B market drastically. This is chump change for a central bank. In this scenario, it wouldn't take long for miners and investors to lose interest (or their shirts) and the whole thing implodes.

In some distant end-state equilibrium, essential goods and services might be directly transactable using these coins, somewhat alleviating this issue. (Even then, currency manipulation could make it very difficult to set and maintain stable exchange rates.) However, in the here and now, fiat currencies are the only practical means of paying for food, shelter, and healthcare. Therefore, I think the price kinetics over the next 5-10 years are pretty bleak. To me, there is an intractable misalignment of incentives due to the untraceability of taxable profits.

I'd love to hear some counterarguments, thanks for reading!

[BQ]

this is a very interesting topic and I don't know anything about it, but couldn't the actions you propose, theoretically cause some surge of development towards making BTC support the same type of privacy somehow?
I mean, if all the people dealing with privacy coins would go to BTC due to the market cap it would be far more difficult to affect the price.
but maybe it's not possible?

[amicrypto]

If I understand your question correctly, the point you are trying to raise is that privacy coins such as Monero/Zcash/Zcoin are not good investments because they are quite susceptible to price manipulations and the entire network can be brought to a standstill.

Well, I agree that price manipulations can cripple the network but then the government cannot kill the network. When the Bitcoin network was created, it was supported by open source community that developed the project to build a solution for payment. The prices were very low yet the network flourished. Even if the agencies create massive short positions and reduce the value to dump, there would still be a community that will rebuild the network and the ecosystem would grow again.

[LeGaulois]

Well, what about manipulations on stock markets? I don't think privacy coins are more different to compare with. Injecting  couple of million dollars on Bitcoin would have the same effect than a privacy coin or the stock markets (sure it would need more or less million depending on the market)

[Diced90]

The uncertainties you have about these coins are relevant but at the same time nothing can be fixed so even if regulations do come down against crypto for sure not only these coins will feel this change. In other words, be cautious but at the same time do not limit yourself with the fear of what may or may not happen.

[idegani]

Thanks for the great feedback/questions! Here are my responses.

@BQ I think adding privacy to BTC would weaken it in the regulatory sense. You would invite more shady/tax-evading transactions and thus more government scrutiny. The consolidation you mention seems likely; I can't imagine many of the altcoins having a future unless they address a specific need that BTC/ETH do not.

@amicrypto From an investment perspective, I don't think there's much difference between crippling and killing the network. My question isn't whether or not governments can shut down Monero - perhaps they cannot shut it down. It's whether they easily could and would make it a bad investment over time, by depressing the price so that investors lose interest. I argue that the answer is yes: they are strongly incentivized to crush a privacy coin, unlike a public ledger coin.

@LeGaulois: Stock markets are fundamentally different because all transactions are reported (not to mention that S&P alone is a $23 trillion cap - much harder to influence). Traders and market makers may not know the parties to all transactions, but the government certainly does. For this reason, stock markets and commodities are not antagonistic to governments the way privacy coins are. Profits are transparent and readily taxable. Similarly, BitCoin is less of an antagonist than Monero because public verification of transactions is possible.

[idegani]

@Diced90 That's definitely the right attitude, and I agree that not investing due to fear of the unknowable is unwise. That said, these thought experiments could be valuable in assessing which altcoins are more likely to succeed long-term.

[BALIK]

At least for Monero, it is not possible to determine the true circulating supply. It could easily be that the founders are slipping new coins into circulation and nobody could prove otherwise. It's definitely possible to make money based on small market changes as with (almost) any cryptocurrency, but to hold it long term is extremely risky. ZCash, Bitcoin Private, Dash are exceptions as the total supply is known as provable, Monero, however, is a different beast.

[davinchi]

My question relates to the long-term investment potential of privacy coins such as Monero/Zcash/Zcoin. At present, I don't see how they have a durable future due to government intervention.

There are a lot of posts about how governments can regulate or ban privacy coins, etc. However, I haven't heard much around the simpler and straightforward route to destroying these currencies: just quietly manipulate them. Gold has remained flat over the last 10 years (annualized inflation-adjusted return of 1.4% 2008-2018), despite massive levels of worldwide quantitative easing. If central banks can influence the price of a $7 trillion commodity, what hope does a currency like Monero have with only a $1.8 billion market cap?

The Fed could decide tomorrow that they don't want anyone making untraceable profits on Monero. They would just have to short the currency at key inflection points to eliminate price appreciation and make it painfully volatile. Unlike public ledger currencies, no one would have a clue where the volatility and price gouging is coming from. Even a small $100 million short could move the $1.8B market drastically. This is chump change for a central bank. In this scenario, it wouldn't take long for miners and investors to lose interest (or their shirts) and the whole thing implodes.

In some distant end-state equilibrium, essential goods and services might be directly transactable using these coins, somewhat alleviating this issue. (Even then, currency manipulation could make it very difficult to set and maintain stable exchange rates.) However, in the here and now, fiat currencies are the only practical means of paying for food, shelter, and healthcare. Therefore, I think the price kinetics over the next 5-10 years are pretty bleak. To me, there is an intractable misalignment of incentives due to the untraceability of taxable profits.

I'd love to hear some counterarguments, thanks for reading!

I think it is still worth a lot considering there are people who want that sort of thing. When the first bitcoin mined it was because the people who started wanted to do it because they were against goverment and wanted to have money that the governments can't regulate and dabble with and ruin which means bitcoin was initially privacy coin as well but it was not as privacy as these coins.

This means there is a certain amount of people who love privacy coins like these, for example spectrecoin has been working towards much better stuff recently and getting attention. So there is an investment viability for these as well.