[header date=”22 January 2019″]Fed researchers say altcoins threaten bitcoin’s value. Black markets still love bitcoin and the CEO of Beam discusses financial privacy.[/header]
Altcoin impairment
Even in the midst of the crypto downturn, officials at the US Federal Reserve are still thinking about the future of bitcoin, and whether the proliferation of altcoins—the non-bitcoin cryptocurrencies—may erode bitcoin’s purchasing power.
In a recent paper from the St. Louis Fed, senior vice president David Andolfatto and senior research associate Andrew Spewak write, “[T]he prospect of a flood of Altcoin competing with bitcoin in the wealth portfolios of investors is likely to place significant downward pressure on the purchasing power of all cryptocurrencies, including bitcoin.”
In layman’s terms, they say that if bitcoin competitors continue to pop up, the new tokens could undercut the value both of bitcoin and the newcomers.
Andolfatto and Spewak predict a future for bitcoin and cryptocurrencies, even if it’s limited. In a crypto world overrun with bitcoin evangelists and doom sayers, that measured view puts them in the minority that sees the forest through the trees. However, their analysis of the altcoin market is problematic.
They compare bitcoin and altcoins to $10 and $5 bills. At face value, this may seem appropriate since bitcoin is much pricier than its nearest competitors and cryptocurrencies are often perceived as interchangeable. The officials suggest that, all else equal, increasing the supply of $5 bills would reduce the purchasing power of all dollars. However, extending that analysis to bitcoin and altcoins isn’t just imperfect—it’s wrong.
Here’s why—$10 and $5 bills are almost perfect substitutes. You can buy an apple pie with a $10 bill or with two $5 bills, and the pie salesman won’t mind. The same can’t be said of altcoins. Bitcoin’s competitors have different competitive advantages (e.g., privacy, speed, uses on blockchain-based applications), and importantly, people don’t uniformly accept altcoins. The recognition of bitcoin and say, Basic Attention Token, is very, very different, and that’s reflected in which cryptos vendors are willing to accept as payment.
The officials’ comparison is also dubious because the creation of new altcoins actually augmented the price of bitcoin itself. During 2017’s crypto boom, investors rushed to buy tiny, no-name altcoins. Oftentimes, these were only available through ICOs or international exchanges, which only accepted crypto as payment. So, investors needed bitcoin to buy them and the ICO and altcoin mania helped raise the bitcoin price higher and higher. (Ars Technica explains this feedback loop beautifully.)
By comparison, dollars don’t have a feedback loop. If the Fed issued a half-penny coin or $200 note, there wouldn’t be a noticeable impact on the purchasing power of existing denominations. Although Andolfatto and Spewak are likely right about altcoins reducing bitcoin’s future purchasing power, they should acknowledge how altcoins contributed to bitcoin’s rise and realize that the size of the crypto market makes it a different beast altogether.
With time, entrepreneurs will probably create more altcoins to fulfill specific purposes, and those could eat away at bitcoin’s total share of the cryptocurrency market. For now, however, bitcoin remains the dominant trading pair for many, if not most cryptocurrencies, and its position as the reserve crypto remains unchallenged. —Matthew De Silva
[supplemental headline=”Market Chatter: Dark web bitcoin”]
[img src=”https://cms.qz.com/wp-content/uploads/2019/01/Bitcoin_transaction_volume_on_darknet_markets.jpg?quality=80&strip=all”]
Bitcoin’s use as a currency has stalled as declining prices have muted enthusiasm for the token. But there’s one area where its use remains robust: the dark web.
Bitcoin transaction volume on darknet markets nearly doubled in 2018, rising to an average of $2 million daily, according to Chainalysis, which sells compliance software for blockchain.
Overall, darknet bitcoin transactions peaked in 2017 at $707 million before falling after AlphaBay and Hansa Market, two black market sites, were shut down by law enforcement authorities. Transaction volume fell 60%, but closing those large sites just meant transactions moved elsewhere, according to Chainalysis.
By the end of 2018, total volume rebounded to $603 million, despite the precipitous decline in bitcoin prices. “For someone who wants to buy something on a dark marketplace, the fact that bitcoin price is fluctuating doesn’t really matter,” Kim Grauer, a Chainalysis economist, told Reuters.
[/supplemental]
On the record: Alexander Zaidelson
[img src=”https://cms.qz.com/wp-content/uploads/2019/01/Alexander-ZaidelsonCEO.jpg?quality=80&strip=all”]
Alexander Zaidelson is CEO of Beam, a cryptocurrency based on the privacy-enhancing Mimblewimble protocol. He previously co-founded Nareos, a peer-to-peer file-sharing company, and Wikitup, a desktop dictionary company. Zaidelson also served as VP of product management at WeFi Inc., and spent two years serving as principal for a venture capital fund investing in growth- and late-stage companies in Israel. He spoke with Quartz’s Matthew De Silva about the advantages and challenges of privacy coins.
Quartz: Why should people care about financial privacy?
Zaidelson: Privacy, financial or otherwise, is a basic human right. Ask 10 people in the street whether they are willing to publicly disclose their bank statements complete with their transaction history. The answer will be a resounding “no.” Same for businesses—no business would want its competitors and customers to see its financial history.
Is complete privacy unattainable? What does the “perfect world” look like?
In today’s world, complete privacy is hard to achieve. We are constantly under scrutiny by leading Internet companies, by CCTV cameras everywhere, and all of our credit cards transactions are processed by financial companies.
A perfect world would be a world where a person can completely opt out of the surveillance, or, even better, opt in for such surveillance only if she chooses so. For example, I would prefer that my search engine does not collect data about me by default, but only if I explicitly allow it to collect such data to improve search results.
In the world of finance, confidential currencies can provide users with almost complete privacy, and it is our belief that more and more users will opt for using such currencies
What are the pain points for maintaining privacy? Exchanges?
On-ramps and off-ramps definitely break the privacy. This is a major pain point. Hopefully, wider adoption of atomic swaps [peer-to-peer trading] will solve this.
Will privacy coins overtake bitcoin or remain niche? Does it matter?
I believe what matters is whether the crypto industry solves for privacy. Whether it is bitcoin or other privacy coins, time will tell. Currently, Mimblewimble seems to be the best cryptocurrency protocol for privacy. In order not to remain a niche however, privacy coins need to also allow optional selective disclosure. Only with such selective disclosure, businesses will be able to use such coins and still be able to comply with regulatory reporting demands
I believe the demand for privacy coins will continue to grow. Until recently, people thought that they have complete anonymity on BTC or ETH [bitcoin and ether], and now more and more people understand that the situation is the complete opposite – anything you do may be observed and analysed
Will companies accept privacy coins for payment? Any signs of adoption?
Yes, more and more companies will accept privacy coins. Just recently, the ultra-popular game Fortnite announced that it will accept Monero for payment. However, without an optional disclosure capability, it will be hard for mainstream businesses to accept privacy coins. Editor’s note: It turns out that Fortnite’s acceptance of Monero was accidental.
Could existing financial institutions implement effective privacy protocols?
Existing financial institutions need privacy, but they also need to be able to report their transactions. The incumbent financial world will have to find ways to embrace crypto, or become obsolete with time.
What non-financial applications, if any, is Mimblewimble useful for? (e.g., smart contract platforms)
Mimblewimble does not support smart contracts. We are researching ways to integrate Beam with smart contract platforms to allow confidential trade of smart-contract based assets, but this work is in early stages.
Zaidelson’s recommendations
- Books: The Bitcoin Standard by Saifedean Ammous, The Road to Ruin by Jim Rickards
- Podcasts: Flippening, Crypto 101
- Projects: Coda Protocol, Spacemesh
[mailto filter=”View from and interview feedback” subject=”Feedback”]Know somebody who we should profile? Let us know.[/mailto]
[supplemental headline=”De-jargonizer: Barts”]
Since the cryptocurrency markets are thinly traded, manipulation can be very apparent on price charts. Traders have taken to calling one of the patterns, associated with pump-and-dumps, “Barts” because of their close resemblance to the hair of cartoon character Bart Simpson.
[img src=”https://cms.qz.com/wp-content/uploads/2019/01/BartSimpson1.jpg?quality=80&strip=all”]
During Barts, the price of a cryptocurrency suddenly spikes—for bitcoin, these jumps are often by a few hundred dollars. Then, for a few hours, the price bounces around at higher-than-normal rates before suddenly dropping to pre-spike levels.
[mailto filter=”Jargon” subject=”De-jargonize this…”]Heard a new crypto term? We can tell you what it means.[/mailto]
[/supplemental]
A big announcement for Private Key subscribers
Changes are coming to Private Key. Starting next week, Private Key subscribers will become Quartz members, and gain access to exclusive membership content at no additional cost. For subscribers who prefer to read Private Key by email, the only change you’ll notice is that Private Key will be delivered Tuesday and Thursday, instead of Tuesday and Friday. But all subscribers will also be able to read Private Key on qz.com, as well as our Field Guides—weekly deep dives that help you make sense of the forces shaping the world—and Tipping Points, a new weekly column covering economics and investing. Numerous new editorial features will be rolling out over the next year.
The cost of the service you subscribed to will not change. If you paid for the annual rate, you will receive access to Quartz membership for a year after your signup date, with a renewal charge occurring after a year. If you pay monthly, you will continue to be charged the same rate every month. If you currently pay for both products, you will be refunded for Private Key and your subscription to Quartz membership will continue.
Currently, we manage our Private Key subscriptions via Memberful. Your login at https://qz.memberful.com will not change—this is where you can change your password, cancel your subscription, and more. Once the transition takes place, you will still manage your account settings here.
You will also be provided with a Quartz account, attached to your email address, and will be asked to set a password. That account will allow you full access to Quartz membership content, including the Private Key column on the web. While this account will allow you to read Quartz membership content, you will still adjust your billing information via Memberful.
We’re excited about these changes and we hope you will be, too.
Please send news, tips, and apple pies to privatekey@qz.com. If this email was forwarded to you, click here to sign up for your own subscription, which includes a free two-week trial. Today’s Private Key was written by Matthew De Silva, and edited by Oliver Staley. Behind every beautiful thing, there’s some kind of pain.