The cryptocurrency market has been declining since the end of 2021. At the beginning of May 2022, it peaked in a dip that had an equally severe effect on the traditional market. A recent bust removed some speculation from the market. But the shaking is different than before. There are still many more active users using the Bitcoin network than we have seen in previous rounds. Many more holders and believers crossed over to the other side. However, as this increases over time, one of the concerns that some have about Bitcoin (BTC) may affect its adoption. It is an economic incentive, not just a utility, that privacy currencies can offer as a solution.
At different times in the first half of 2022, both in cryptocurrency markets and giant dumps, privacy currencies such as Monero (XMR), Dash (DASH) and Zcash (ZEC) have performed relatively well against other altcoins. Does this mean that there is an underlying demand for interest in cryptographic privacy?
The Bitcoin standard has finally arrived (well, not yet)
For the sake of this discussion, let’s assume that Bitcoin did. Bitcoin is now the dominant currency in the world. But due to the pseudo-anonymous nature of the Bitcoin blockchain, anyone can see all the transactions for each wallet. And for every coffee purchased, the buyer’s spending habits, the location where the spending took place, and all the dystopian traps of the 1984 nightmare come true. This nightmare is what has inspired creatures like Monero, Zcash, Dash, Decred (DCR), Secret (SCRT) and Horizen (ZEN), to name a few. Some of these have similar features to Bitcoin. Zcash is a very similar model to Bitcoin with 21 million hard banks and operates according to job proof.
Could it be ruled out that one or two of these blockchain protocols would be adopted as “everyday” trading currency to add to the Bitcoin standard? Protocols such as Monero and Zcash have either shallow inflation or limited supply. They work with their symbolism and promise not to do more than be a medium of exchange and value, other than, of course, protecting the user’s privacy.
Connected: Loss of privacy: Why we have to fight for a fragmented future
Bimetallism: What is it and why does it matter?
Bimetallism is a concept from a long time ago and before the advent of cryptocurrencies. As the name implies, the idea behind bimetallism is that different types of precious metals would be used to offset inflation against the others. Gold usually had silver and vice versa to balance the other if one started to have too much purchasing power. For example, a horse is worth one gold coin or 10 silver coins (gold and silver are rare to varying degrees but still have different physical properties for usefulness). If the horse is now equal to two golds a year later, it could only be 12 silver coins, which makes the trade more palatable for the silver holder, which puts pressure on the inflation price of gold. This bimetallism arrangement works in theory when you have similar media alternately as two precious metals. When the state introduced a mixed fiat currency, Grisham’s law came into force with retaliation.
Grisham’s law states that bad money drives out good. If the holder has a fiat or bitcoin, then there is a high probability that they will value the product / service less than they do BTC and exchange fiat, which has a potentially unlimited supply. This means that Bitcoin will sit, unused, in people’s wallets forever, destroying some of the value proposition of distributed money for the world. If we are to assume that the world is turning to digital media alternately, it will not change the laws of economics.
Connected: Gold, Bitcoin or DeFi: How can investors hedge against inflation?
Bitcoin can be a unit of account, a medium of exchange, a store of value and other features that match the Gold 2.0 narrative. And Bitcoin’s traceability is a good feature that has its uses. As we now see with Bitcoin-backed loans, the transparency of ensuring that creditors have funds is of great benefit to the chain. But do you want the coffee bar owner to know that you shop at the antique shop every Wednesday? Do you want your boss to know about your personal finances? Or anyone interested in viewing your payment history?
This is where the idea of bimetallism, or “bicryptoism”, can step in and solve these issues. If Bitcoin is introduced with one or two different, scarce and limited media (privacy coin), they can help keep the purchasing power of goods / services in a constant “constant swing” towards each other. This is of course the future when Bitcoin is the world’s dominant currency.
Because these different protocols have different properties (just like gold and silver), they can serve different roles in users’ lives. For day-to-day trading, users can enjoy the privacy that privacy coins can offer while taking full advantage of distributed ledger and blockchain technology. When users want to transfer their money to wallets that have an official address, they can choose to keep their money in Bitcoin. Perhaps, with features like chain atomization, this can be even easier than a distributed or centralized exchange.
Satoshi Nakamoto, the mysterious inventor of Bitcoin, once wrote: “For more privacy, it is best to use Bitcoin addresses only once.” A new BTC address for each user would be rather inefficient for the 2022 cryptocurrency user, nevertheless a world where Bitcoin is the standard medium for exchange. Users must either try to create Bitcoin Reform (BIP) to convert Bitcoin to accept to include privacy enhancing features or be parallel to options in a “bicryptoism” configuration with one or more privacy coins. The latter has the added economic benefit of keeping inflationary pressures lower over time.
These are just a few thoughts for the future and the larger cryptocurrency community needs to think about these potential issues as we move forward. Economics played a big part in the creation of Bitcoin and the cryptocurrency revolution, and it should also be a great source for informing its future.
This article does not include investment advice or advice. Every investment and business involves risk and readers should do their own research when making a decision.
The views, thoughts and opinions expressed herein are the sole responsibility of the authors and do not necessarily reflect or represent the views and opinions of the Cointelegraph.
Michael Tabone is an economist at Cointelegraph Research. Ph.D. candidate, engineer, economist and business man, he also provides strategic advice to companies focusing on DeFi and the blockchain space. Michael has co-authored several reports for Cointelegraph Research and writes a quarterly venture capitalist report, which is published in the Cointelegraph Research Terminal. Ph.D. essay is about DAOs and their practical use in the business world.
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