Privacy Coins Explained – Should You Invest in Them?

Many people think Bitcoin transactions are anonymous, but this is nowhere near the truth. In fact, every single transaction is recorded in the ledger. That means if you were to find out someone’s wallet address, then you could actually follow their transactions like a trail of breadcrumbs. Since you have to provide this address to someone in order to receive any payments at all, this is not difficult information to get a hold of.

Because of the growing concerns that many crypto advocates have about privacy, certain cryptocurrencies have been created to address these issues. They are referred to as privacy coins, and these currencies have implemented several features which can help to mask, cover the tracks of or even erase your transactions.

Even if you have no intention of using these coins for purchases yourself, as an investor it can be a good idea to have some in your portfolio for diversification purposes. So, in this article, we’ll be talking about private currencies and a little bit about how they function.

How do privacy coins work?

In the old days, before anyone had access to currencies that would protect your transaction data, people would use something called a mixer. This is essentially software that will bounce your bitcoin between different wallets in an effort to confuse people who may want to trace your activities. This method worked well enough, but it meant you had to trust an outside source with your money and hope that they would not steal it.

To that end, privacy-focused currencies were created to essentially do the same thing, but without the need for a third party and on a grander scale. The way they do this can vary a little between each currency, but here’s the main features that privacy coins tend to implement.

Ring signatures

This is a method by which some privacy-focused cryptocurrencies try to fool those who may be spying on the network. It takes all of the transactions happening on the blockchain, and it makes it look as if all of those parties are transacting with each other.

This makes it almost impossible to see where a transaction has come from, effectively protecting all parties, because none of them can be singled out. While theoretically, it’s not totally foolproof, this is currently one of the best methods for hiding transaction data and protecting participants.

zk-SNARK

This privacy protocol is still developing, and it is not yet widely used. However, it is part of the zero-knowledge proof system. Essentially, the easiest way for a system to not reveal information about you is if that information was never there in the first place.

By using this technology, blockchains will be able to verify the information of both parties without ever revealing it by asking a series of questions repeatedly until a consensus on the transaction is made. There is some worry that these answers could be spoofed though, and that’s why zk-SNARK is not as widely used yet as ring signatures are.

Stealth addresses

If you give someone your Bitcoin address, it’s possible for them to see the entire balance of your wallet. This is obviously undesirable for many reasons, and most people don’t want everyone to know exactly how much money they have.

This makes you a prime target for theft and social engineering scams. Many private coins use stealth addresses. These addresses will not reveal your wallet balance, and it allows you to safely request money without revealing your wallet’s true location.

What is the best method for private transactions?

The future of private transactions likely sits with zero knowledge, however, the technology is not yet fully developed, and there are a few security concerns to address still. Ring signatures are quite safe, and while there is, of course, a chance that new technologies will be able to link the transactions of currencies like Monero, at this point in time it is not very likely.

Some currencies offer private features but do not require all transactions to be private. This causes problems for some people in that the network is not fully trustworthy if every transaction is not private. However, some coins have allowed for the choice so as to entice merchants to adopt their coins for payment, since some are hesitant to accept these cryptocurrencies.

Why should I invest in private coins?

Some people believe that these coins are only for criminals, but this is not true. They are simply for anyone that does not approve of the way that governments or organizations handle their private data. Using a private coin allows you to protect yourself by hiding your wallet information from those who would try to compromise it, and in many cases, this is the best way to protect your assets from theft or fraud.

While many people still believe that all cryptocurrencies are more or less anonymous, those attitudes will likely change in the future. Once this information becomes more apparent to the general population, it’s likely that more cryptocurrencies will adopt stealth features, but the already established ones such as Monero or ZCash will begin to see more use. Especially after they achieve more adoption with vendors.

Stealth coins are just another sector in the cryptocurrency ecosystem, and it’s a great place to diversify your assets a little. Socking a little of your gains away into a large market cap stealth currency such as Monero is both a great way to preserve the value of your portfolio and prepare yourself for the future. You may even want to invest in a couple of different coins that you see potential in.

Some coins to consider

Monero

The most famous of all privacy coins, if you invest in Monero, then you will have a great store of value currency. This is the most widely used privacy option, and it has widespread adoption with many vendors. Monero is the most likely candidate for any merchant to integrate if they are interested in accepting a privacy-focused cryptocurrency.

This particular coin also benefits from having many exchange listings, and if you want to transfer some of your money into Monero, then it’s very easy to do. This is typically the first choice for anyone who is interested in using or owning a privacy-focused investment.

ZCash

Likely the second most popular stealth coin, ZCash’s innovated Zk-SNARK protocol is loved by many, including Edward Snowden. While not as widely accepted as Monero, this currency is working towards the future of private transactions.

They do not, however, have nearly as much adoption as Monero does, and they are lagging a little further behind because of it. That could very well change in the future though, and as an investor, you may want to put a little money here as well.

PIVX

If you’d like to own a lesser-known private coin that is also a proof of stake asset, then this may be a good option for you. This currency provides instant and private transactions, and you’ll be able to mint new coins to spend instead of buying them, effectively limiting your ties to transactions.

The annual return is a nice bonus if you plan to hold a good deal of your investment in a privacy-focused cryptocurrency, and it gives you a good opportunity to continually add new funds to your portfolio without any actual new input from yours. Investors should keep in mind that this currency is not nearly as proven as the other options on our list, and it will likely not hold value as well in the event of a crash.

Conclusion

There are of course many other currencies to consider, and you should take a moment to familiarize yourself with all of the options out there before proceeding. While a top market cap coin will help preserve your investment, there’s still smaller cap assets which could net you some very nice returns. New technologies are cropping up in this corner of the crypto-verse every day, it’s worth it to try to keep on top of these new developments.

Before investing in any currency, you should of course fully research the project’s goals, team and their roadmap. Ask yourself what this particular currency brings to the table. Is it doing something new that will make it better than the current options already available?

It’s important to remember that Monero has a very established foothold here, and in order for a new privacy coin to take its place, it will need to do something truly spectacular. Something that’s just another clone but adds no real functionality is not going to cut it for your portfolio.