Can a lesson in bimetallism help the long-term stability of Bitcoin and privacy coins?

The lesson of bimetallism is that the value of a currency is proportional to its relative purchasing power. If one metal becomes rarer, it will become more valuable than another and vice versa. This dynamic changes how we view an economy as well as how we think about including new coins in our portfolios, especially when they’re also privacy coins.

The “will privacy coins be banned” is a question that has been on the minds of many cryptocurrency enthusiasts. If a lesson in bimetallism can help Bitcoin and other cryptocurrencies, then it should help with privacy coins as well.

Since the end of 2021, the crypto market has been on a downward trend. It culminated in a drop in early May 2022, which shook conventional markets almost as heavily. The latest market crash took off part of the market’s speculation. However, this time is different than in the past. The Bitcoin network still has a far higher number of active users than in previous cycles. Many more sincere believers and holders made it to the other side. However, if this trend continues, one of the worries some people have about Bitcoin (BTC) is that it will have an influence on its acceptance. Privacy coins may provide an economic incentive, not only a benefit, as a solution.

Privacy currencies like Monero (XMR), Dash (DASH), and Zcash (ZEC) have done very well versus other altcoins at various periods in the first half of 2022, both in crypto market rallies and major dumps. Is this an indication that there is a fundamental desire for crypto privacy?

The Bitcoin standard has arrived (well, not yet)

Let’s assume Bitcoin makes it for the sake of this debate. Bitcoin is currently the most widely used money on the planet. However, because of the Bitcoin blockchain’s pseudo-anonymous structure, anybody can view all of the transactions for each wallet. And for every cup of coffee bought, the buyer’s purchasing habits, the location where the expenditure occurred, and all the other dystopian trappings of a 1984-inspired nightmare are a reality. This nightmare has inspired the invention of cryptocurrencies such as Monero, Zcash, Dash, Decred (DCR), Secret (SCRT), and Horizen (ZEN), to mention a few. Some of them have characteristics that are comparable to Bitcoin. Zcash is based on the same principles as Bitcoin, with a hard limit of 21 million coins and a proof-of-work algorithm.

Can a lesson in bimetallism help the long-term stability of Bitcoin and privacy coins?

Is it possible that one or more of these blockchain protocols may be accepted as a “everyday” transactional currency to supplement the Bitcoin standard? Monero and Zcash, for example, have either a low inflation rate or a limited quantity. They act with their tokenomics and offer to be nothing more than a medium of trade and a store of value, with the exception of safeguarding the user’s privacy.

Related: Why we need to fight for a decentralized future because of the loss of privacy

What is bimetallism, and why does it matter?

Bimetallism is a notion that predates the invention of cryptocurrencies. The aim behind bimetallism, as the name implies, is to employ multiple kinds of precious metals to counteract price inflation rates relative to one another. In the past, gold and silver were used to balance each other out if one had too much purchasing power. A horse, for example, is worth one gold coin or ten silver coins (gold and silver are rare to different degrees but still have different intrinsic qualities for utility). If the horse is currently worth two gold coins a year from now, it may only be worth 12 silver coins, making the exchange more appealing to silver holders and putting downward pressure on gold inflation. When two comparable means of trade, such as precious metals, this bimetallism arrangement works in principle. Grisham’s Law came into action with a fury when the state put fiat money into the equation.

According to Grisham’s Law, bad money drives out good. If a holder has both currency and Bitcoin, there’s a considerable chance they’ll value the item/service less than BTC and sell away the fiat, which has an almost limitless supply. This implies that Bitcoin will stay in people’s wallets, unused, for the rest of their lives, eliminating part of the value proposition of sound decentralized money for the rest of the world. The rules of economics will not alter if we believe that the world is moving to digital media of trade.

Things like marketable assets will continue to experience price fluctuations. Other assets may be required as alternatives to keep these various media in control. If we don’t want Grisham’s Law to repeat itself, there must be assets that are comparable to Bitcoin but provide a distinct value proposition. Then there are privacy coins.

How can investors protect themselves against inflation using gold, bitcoin, or DeFi?

Privacy is important.

Bitcoin has the potential to be a unit of account, a medium of exchange, a store of value, and other attributes that align with the gold 2.0 story. Furthermore, the traceability of Bitcoin is a useful aspect. As we can see with Bitcoin-backed loans, the chain’s openness in guaranteeing creditors that money exist is a huge benefit. But do you want the coffee barista to know that every Wednesday you go to the antique store? Do you want your employer to know about your personal finances? Or to anybody interested in seeing your payment history?

This is where bimetallism, or “bicryptoism,” comes in to help overcome these problems. When Bitcoin is combined with one or two more rare and restricted mediums of exchange (a privacy coin), the purchase power of goods and services may be kept in continual “stable fluctuation” against each other. Of course, this is in the future, when Bitcoin is the world’s leading currency.

These multiple protocols may serve distinct tasks in users’ life since they have varied qualities (just like gold and silver). Users may benefit from the privacy that a privacy coin can provide while still taking use of the advantages of a decentralized ledger and blockchain technology for everyday transactions. Users may opt to maintain their funds in Bitcoin if they want to move them to wallets with a publicly visible address. This may be even simpler than a decentralized or centralized exchange because to on-chain capabilities like atomic swaps.

“For more anonymity, it’s advisable to use Bitcoin addresses just once,” Satoshi Nakamoto, the enigmatic creator(s) of Bitcoin, previously stated. For the crypto user in 2022, a fresh BTC address for each user would be unfeasible, much alone in a world where Bitcoin is the main means of exchange. Users will have to either submit a Bitcoin improvement proposal (BIP) to alter Bitcoin to incorporate privacy-enhancing features, or co-exist with options in a “bicryptoism” configuration with one or more privacy currencies. The latter has the added economic advantage of reducing price inflationary pressures over time.

These are only some ideas for the future, and the crypto community as a whole has to consider these challenges as we go ahead. Economics was essential in the creation of Bitcoin and the cryptocurrency revolution, and it should continue to be so in the future.

There is no financial advice or suggestion in this article. Every investing and trading choice has risk, and readers should do their own due diligence before making a decision.

The author’s views, ideas, and opinions are entirely his or her own, and do not necessarily reflect or represent those of Cointelegraph.

Michael Tabone is a Cointelegraph Research economist. He also offers strategic consultancy to organizations focusing on DeFi and blockchain. He is a Ph.D. candidate, engineer, economist, and business strategist. Michael has co-authored many studies for Cointelegraph Research and contributes to the Cointelegraph Research Terminal’s quarterly venture capitalist report. DAOs and their practical applications in the corporate sector are the subject of his Ph.D. dissertation.

Bitcoin and privacy coins have been in the news a lot lately. It is not surprising, as they are some of the most popular cryptocurrencies on the market. However, many people are not aware of how bimetallism could help with their long-term stability and privacy. Reference: coindesk privacy.

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