Andrew Lockley – Exponential Investor (United Kingdom) –
How much do you value your privacy?
Depending on who’s asking, your answer could get you into more trouble than you think.
You know the narrative: privacy helps terrorists and child abusers. If you live in one of the world’s major democracies, you have no need of it… What are you trying to hide anyway?
At least, that was the narrative. But things are beginning to change.
Ordinary people are becoming painfully aware of how little privacy we’re entitled to.
Many job offers now come with the caveat you handover your Facebook password before they make their final decision.
Google sells your browsing habits to advertisers. As do the majority of those “free” services you use. Remember, “If the service is free, you’re the product.”
And the government, well let’s not forget about them. In the UK, it keeps a record of every website you’ve ever visited and every email you’ve ever sent on file, just in case.
And it isn’t the only one – almost every government in the world has a similar scheme in place. Many of them even more invasive.
It all just kind of… crept up on us.
It’s getting more and more absurd
And when you think about it, it doesn’t make any sense.
We live in an era where our trust in the media, the government and the “authorities” is at near all-time lows. We take any opportunity we can to stick two fingers up at those cronies. Yet the amount of personal information we freely give to them is ever increasing.
The absurdity of this situation could only go on so long before an inevitable backlash.
And that backlash is arguably what’s behind bitcoin’s meteoric rise.
Bitcoin offers a new system of money, out of the government’s reach. One that can’t be manipulated or debased by central banks. And one that ensures its users privacy.
At least, that was the idea. But it recently came to light that bitcoin isn’t all that private after all.
Bitcoin’s biggest lie
It shouldn’t be news to anyone involved in crypto that bitcoin isn’t, in fact, anonymous.
Yes, your address is just a series of numbers and letters that don’t link to your identity. And yes, there’s no way to know who created, or owns, any given address.
That is, until you use it.
When you receive bitcoin to that once anonymous address, the entire transaction history of said bitcoin is sent along with it. This history is stored on the public ledger, along with every transaction you ever make. And it’s viewable by anyone.
This is the entire point of the blockchain technology bitcoin runs on. To keep the system decentralised, and ensure no government can take it down, it all needs to be publicly verifiable.
So, although your bitcoin address may not be linked to your identity, it’s easy to see who you’ve interacted with, and who they’ve interacted with. By examining the public ledger, you can find out of who knows who, and how much money they’ve been trading with each other.
And this isn’t even the biggest problem. Don’t forget your account balance is also on the public ledger.
Want to “hide” £500,000 through bitcoin? Not gonna happen. It’s all on the public ledger: how much is in your account, where it came from, and where you eventually transfer it to.
IRS buys bitcoin analysis startup
Just to bring that point home. The Internal Revenue Service (IRS) now has specialist tools to “visualize, track, and analyze bitcoin transactions,” according to a contract The Daily Beast obtained in August.
It’s become so useful to it, the IRS even went as far as to acquire the company, Chainanalysis, which created the tool.
The Daily Beast reports Chainanalysis’ clients include law enforcement, banks and regulatory entities. Just the kind of people bitcoin was meant to keep you safe from.
Currently, the best way to keep your anonymity while using bitcoin is to use a bitcoin mixer.
When you send them your transaction, they mix it in with a huge pool of other people’s bitcoins before sending it on. The theory is your bitcoins get lost in the mix and are very hard to trace.
However, mixers aren’t foolproof. They may even be easy get around. That’s why, on 22 August 2017, bitcoin’s biggest mixer, Bitmixer.io, announced it was shutting down.
Why? Well here’s the statement it left on bitcointalk.org (click for a larger image):
“After the deep investigation I confirm that MONERO is the best privacy currency. So I strongly recommend MONERO for all people who need extra privacy.”
Much hype about Monero
Monero had been a fairly stable cryptocurrency over the middle of 2017. It hadn’t risen to fame overnight like OMG or NEO did. It’s always been there, in the background, in the upper half of the top 100 cryptocurrencies.
Then on 21 August 2017, something major happened, and it went vertical. Over the next five days it shot up 180%, from £41 to £115.
Exchanges were full of people rushing to get in. the Reddits were split between those who’d been singing Monero’s praises for months and those FOMOing (fear of missing out) hard to get in.
This post in Monero’s subreddit is a fantastic example of that (again, click for a larger image):
That one thread sums up much of the current feeling in the cryptocurrency world. At least, the feeling on public forums.
On the one side, you have people who do their research. All of it. They read the white papers, they look into the history, they research the philosophy and ideals. They are probably coders to some extent themselves. They back a project they believe in and become a big part of its community.
On the other, you have the people they look down on: the FOMOers. These people see a crypto shooting up on CoinMarketCap. They remember the ungodly gains made by Ether, OMG, NEO, Ripple, etc, and want in.
They don’t do any research – why would they need to? It’s clearly heading for the moon! – dump their last hypecoin and buy into this rising star.
Outside of professional investors (few, but growing) crypto – I’ll call them enthusiasts – essentially settle into one of those two camps. Maybe not as extreme as those caricatures. But most will resemble one camp more than the other.
So, how is Monero “much different” from bitcoin, and what makes it so special?
Protection from the death penalty?
To start with, Monero takes privacy deadly seriously. As it makes clear in the values section of its website: “Monero takes privacy seriously. Monero needs to be able to protect users in a court of law and, in extreme cases, from the death penalty.”
Let’s look at how it does it.
As we’ve just covered, bitcoin’s biggest barriers to anonymity are:
And we can compare that to Monero’s main selling points, which are:
How does Monero achieve this? Stealth addresses and ring signatures.
Stealth addresses let payees generate one-time public addresses that payers can send to. Once this is on the blockchain, the payee can find it, generate a private key from it and spend it. And this spend is never associated with the payee’s wallet.
If that description was hard to get your head around, Monero has a great three-minute video explanation here.
So that takes care of the receiver’s privacy, but what about the sender? That’s where ring signatures come in.
Ring signatures are sort of like a multi-signature model, where all signatures are equally important, but only one of them is the real one. All the signatures appear equally plausible to an outside observer. And only the person with the right private key can work out the real one.
Again, Monero has a simple three-minute video that explains ring signatures here.
It’s all a little more complicated than that. But you get the gist – Monero’s security and anonymity is very, very good.
If you want to delve deeper into just how good for yourself, you can have a read of its white papers.
Heavy lies the head that wears a crown
Now, Monero isn’t the only crypto that allows anonymous transactions. But it is widely regarded to be the best.
The biggest rivals to Monero’s system are currently Zcash and Dash. However, they both have a major security flaw.
Their transactions aren’t anonymous by default. You have to choose to switch anonymity on. This means their blockchain isn’t wholly private, just bits of it are. And that brings us back to the same problems bitcoin has.
The second biggest cryptocurrency, Ethereum, is also working on anonymity tools. But so far, what Ethereum is proposing makes it no contender to Monero’s crown. Time will tell just how good Ethereum’s anonymity protocols turn out to be.
All this leads to the question: just how good is Monero’s anonymity?
Well, did you ever hear what happened to the founder of AlphaBay, the dark web’s biggest marketplace, when he was caught in July 2017…?
The FBI brought down Silk Road and AlphaBay – but it still can’t crack Monero
On 20 July 2017, The Register broke one of the biggest internet stories of the year. But the chances are, you never heard about it.
The FBI had finally managed to shut down AlphaBay and throw its owner in prison.
AlphaBay emerged late 2014, around a year after the FBI busted Silk Road and auctioned off its 50,000 bitcoins. (There’s an interesting story behind that auction that I’ll get into that in another essay.)
There are many noteworthy things about the AlphaBay story. But the most intriguing telling one in relation to cryptocurrencies is this statement by the FBI:
“In total, from CAZES’ [AlphaBay’s owner] wallets and computer agents took control of approximately $8,800,000 in Bitcoin, Ethereum, Monero and Zcash, broken down as follows: 1,605.0503851 Bitcoin, 8,309.271639 Ethereum, 3,691.98 Zcash, and an unknown amount of Monero.”
An unknown amount of Monero.
That’s right, it couldn’t work out how much Monero AlphaBay’s founder, Alexandre Cazes, owned. Even after busting his whole operation wide open.
That statement has been posted ad infinitum in cryptocurrency circles to demonstrate just how good Monero is at protecting people’s privacy.
The FBI managed to account for all the other cryptos down to the last coin, but not Monero. Its tech is just too good.
There is, however, a darker theory about the “unknown amount” of Monero.
How much Monero would you kill for?
Shortly after Cazes was caught, just one week in fact, he was found dead in his Thai jail cell.
The authorities say it was suicide. But there’s more sinister explanation doing the rounds.
Given AlphaBay’s investigators were extremely clued up on the cryptocurrency world, they would have known Monero is untreatable.
They would have known no one could find out how much was held in Cazes’ accounts without access to his private key. And they would have known no one would ever able to trace where those funds went.
It would have been very easy for them to share the funds between themselves. And let’s not forget, we’re talking about a lot of money here. Potentially tens of millions of pounds.
The only weak point in that plan would be the man who knew exactly how much was held in those accounts and would be able to testify if any had “gone missing” since his arrest.
It’s a lucky coincidence, then, that he decided to kill himself before those figures came to light.
Yeah, sure, suicide.
And it probably was. But I guess we’ll never know.
Still, the conspiracy theory is enticing, isn’t it?
How big could Monero get?
Okay, that all got a little dark. Let’s get back to the question at hand. How big could Monero get?
Well to answer that, we need to go back to our original question: how much do you value your privacy?
Or maybe not you personally, but people in general.
Or how about just the mega rich wanting to hide portions of their wealth from prying eyes. It’s easy, and foolproof, with Monero.
And given that Monero’s total market cap is currently only £4.27bn, it would only take one or two of the world’s 2,043 billionaires to send it on a tear.
And that’s just individuals. The disruption Monero could bring to business is huge.
Imagine being able to source your products without your rivals ever knowing how much you paid for them. Remember, when you use Monero, the value of your transactions is always hidden. It could be a game changer.
Plus, we have the whole fightback against the establishment going on. What better way to stick it to the bankers who caused the 2008 crisis than by opting out of their system entirely?
That was always bitcoin’s aim. To do away with the central banks, to bring money back to the people, and to end the mass market manipulation.
Monero now picks up where bitcoin left off.
Will one of the other, bigger, cryptocurrencies ever create privacy protocols to rival Monero? I guess we’ll have to wait and see.
But for the moment, Monero reigns supreme.
Until next time,
Editor, Exponential Investor