It has been a painful two years for advocates of “privacy coins” in the cryptocurrency market, of which I am one. In a world with tens of thousands of different digital currencies, very few have met anything resembling real world utility. An important and generally overlooked category in the cryptocurrency market has been those focused on preserving individual privacy.
For those unacquainted with the thesis; the most popular and widely used cryptocurrencies like Bitcoin (BTC-USD) and Ethereum (ETH-USD) are generally abhorrent at protecting individual privacy. Yes, they offer pseudonymous activity. But with all of the major cryptocurrency on-ramps implementing the kind of KYC/AML standards that would be expected of any bank or brokerage firm, anyone buying these coins through an exchange and using them on-chain can be easily identified by governments when push comes to shove.
This is probably fine if cryptocurrency participants are comfortable with all of their on-chain activity being transparently identifiable in the future, but it could make most real world economic activity unviable on public blockchain rails long term. Take for instance how easy it has been for third parties to identify the public wallets of the newly approved spot Bitcoin ETFs. With the ability to use any block explorer and some basic investigation skills, it’s incredibly easy to figure what people are doing on-chain.
For asset managers this is actually a really good thing. We expect that our financial institutions would have all of the assets they say though do. But at times they don’t, as we just witnessed with Celsius and FTX. However for individuals and small businesses, this level of transparency has significant drawbacks. Those drawbacks include but are in not limited to protecting the secrecy of employee wages, material suppliers, and strategic investments.
Privacy Coins Underperform
Recognizing that financial privacy is an important element of personal freedom and that most public blockchain ledgers are notoriously challenged in this regard, several privacy coins have surfaced over the last decade or so. All of them have underperformed the blue-chip assets. There are several attempts at on-chain privacy and each protocol takes a slightly different approach. Mixing service Tornado Cash (TORN-USD) was infamously sanctioned by the US Treasury Department in August of 2022 and since then, many privacy coins have declined considerably since that announcement while BTC has nearly doubled:
The one privacy coin that seemed to be holding up the best of the bunch was Monero (XMR-USD). However, that changed on February 6th when Binance (BNB-USD) announced that it was delisting XMR and three other coins. For Monero, the rationale for delisting stems from a new exchange policy that crypto deposits must come from publicly transparent wallet addresses. This is possible with some privacy coins but not with XMR which is transparent by default.
XMR subsequently collapsed 36% on the day. I have admittedly been a bigger proponent of Zcash (ZEC-USD) than of XMR. These communities have generally been antagonistic toward one another which I don’t think has been helpful to either camp. But to be clear, I get no joy from seeing XMR get delisted from Binance and I think that it’s discouraging that this is happening for the XMR community, XMR holders, and privacy in general.
Given the damage to the long term XMR trend on February 6th, one may be wondering if now is the time to go long Monero after what has been a sizeable decline in a very short amount of time.
Market Dynamics
There are a few things to consider when trying to project the impact of this Binance delisting on XMR. The obvious one is exchange liquidity. Binance is the largest exchange in the entire market by a fairly wide margin:
That said, while still commanding a large share lead over the next closest exchange, Binance has seen share decline throughout the last year having fallen from 62% in February 2023 to an average of a little over 38% over the last three months. Based on January exchange data from The Block and market pair data from CoinMarketCap, Monero’s remaining exchanges are all out of the top 5 after Binance delists:
Vol Rank | Exchange | January Volume ($b) | XMR Listing? |
---|---|---|---|
1 | Binance | $446.05 | Ends 2/20/24 |
2 | Upbit | $90.25 | No |
3 | OKX | $84.44 | No |
4 | Huobi/HTX | $57.92 | No |
5 | Coinbase (COIN) | $75.85 | No |
Sources: The Block, CoinMarketCap
Following Binance, the exchanges with the most USD-denominated volume for XMR appear to be Kucoin, Gate.io and Kraken. Of the bunch, only Gate has done at least $30 billion in total crypto market exchange volume in each of the last three months. The point is, XMR’s exchange liquidity is taking significant hit with this news. Since exchanges serve as such important crypto on-ramps, this is bad for onboarding new XMR holders. Looking at the derivates data, we can observe some really telling signals:
It’s not the greatest chart quality in the world but if you click the picture to enlarge you may see that open interest spiked all the way up to $59.2 million on February 6th. This was a 160% increase in OI in just a 24 hour period and the largest level of open interest in XMR since August 2022 when the Treasury Department sanctioned Tornado Cash. February 6th also saw the biggest single day volume spike in XMR that I can find in at least the last four years. On February 5th, XMR volume was slightly under $25 million. On the 6th, volume took out $1.1 billion.
The Case For Buying The Dip
Even as someone who admittedly has preferred the technology behind Zcash rather than ring signatures, I can admit Monero has been far better at being a usable form of private currency:
It was somewhat of a battle back in 2017, but Monero been the daily transaction leader over Zcash for nearly 6 full years in the privacy coin realm. Monero averaged 22k daily transactions in January – more than ten times that of Zcash. If you’re looking for a cryptocurrency that can be privately transacted on the main layer, XMR is still the leader.
The Case For Not Buying The Dip
From an investment standpoint, privacy just isn’t a compelling enough narrative in the cryptocurrency market in 2024. It seems clear through several years of underperformance that the market is more willing to introduce privacy through secondary layers and custodial applications than through the base layer. The ethos of the broader cryptocurrency community simply don’t reflect what the original goal was from the Cypherpunk movement that spawned Satoshi Nakamoto and Bitcoin 15 years ago.
While I actually think the Monero community has done well to stick to their principles, from a non-investment standpoint, there is a very distinct possibility that privacy coins could become criminalized in the future depending on which jurisdiction you may find yourself in. That’s probably a legitimate enough risk to steer most people away.
Final Thoughts
In my personal view, privacy coins are a fringe novelty in a larger crypto ecosystem that has historically been more concerned with chasing gains than with real utility. I think this is extremely disappointing, but at a certain point one has to face the reality of the situation and operate in the world that we have rather than the world that we might want.
As a network, Monero will be fine. XMR will be used by the same people who have been using it the last several years. It’s a digital currency for people who value privacy. That doesn’t necessarily make it a great long term investment but it also doesn’t mean you have to necessarily sell it if you own it either. Everything has risk. It’s up to each individual to determine which risks they’re willing to take on. Longing Monero has both investment and legal risk in my view. But I’d say the same about any privacy coin at this point.