What are privacy coins? 6 of the biggest compared
We take a look at privacy coins and the technology behind them.
Don't invest unless you're prepared to lose all the money you invest. This is a high-risk investment and you should not expect to be protected if something goes wrong. Take 2 mins to learn more.
Estimated reading time: 2 min
Due to the potential for losses, the Financial Conduct Authority (FCA) considers this investment to be high risk.
What are the key risks?
1. You could lose all the money you invest
- The performance of most cryptoassets can be highly volatile, with their value dropping as quickly as it can rise. You should be prepared to lose all the money you invest in cryptoassets.
- The cryptoasset market is largely unregulated. There is a risk of losing money or any cryptoassets you purchase due to risks such as cyber-attacks, financial crime and firm failure.
2. You should not expect to be protected if something goes wrong
- The Financial Services Compensation Scheme (FSCS) doesn't protect this type of investment because it's not a 'specified investment' under the UK regulatory regime – in other words, this type of investment isn't recognised as the sort of investment that the FSCS can protect. Learn more by using the FSCS investment protection checker.
- The Financial Ombudsman Service (FOS) will not be able to consider complaints related to this firm or Protection from the Financial Ombudsman Service (FOS) does not cover poor investment performance. If you have a complaint against an FCA regulated firm, FOS may be able to consider it. Learn more about FOS protection here.
3. You may not be able to sell your investment when you want to
- There is no guarantee that investments in cryptoassets can be easily sold at any given time. The ability to sell a cryptoasset depends on various factors, including the supply and demand in the market at that time.
- Operational failings such as technology outages, cyber-attacks and comingling of funds could cause unwanted delay and you may be unable to sell your cryptoassets at the time you want.
4. Cryptoasset investments can be complex
- Investments in cryptoassets can be complex, making it difficult to understand the risks associated with the investment.
- You should do your own research before investing. If something sounds too good to be true, it probably is.
5. Don't put all your eggs in one basket
- Putting all your money into a single type of investment is risky. Spreading your money across different investments makes you less dependent on any one to do well.
- A good rule of thumb is not to invest more than 10% of your money in high-risk investments.
If you are interested in learning more about how to protect yourself, visit the FCA's website here.
For further information about cryptoassets, visit the FCA's website here.
Privacy coins are a class of cryptocurrency with privacy and anonymity at their core. In this guide, we'll look at the most popular coins on the market, how they stay private, where they differ from Bitcoin and what to consider when buying this type of cryptocurrency.
This is not an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade or use any services.
What are privacy coins?
Designed for maximum confidentiality, privacy coins take the pseudonymous benefits of cryptocurrency a step further. Not only do these coins attempt to hide the identities of their holders, but they also differ from regular cryptocurrencies by deliberately concealing wallet addresses and transaction amounts.
How do privacy coins work?
While all privacy coins use blockchain technology, here are a few examples of the various techniques used by projects to set themselves apart and remain anonymous, ranging from complex Conjoin methods to simple stealth addresses.
Conjoin
Dash (DASH) is the most well-known cryptocurrency to use the Conjoin privacy method. DASH works by mixing tokens from multiple senders into a single transaction before distributing them to new end-user addresses as a part of its Private Send feature.
zk-SNARKs
Through zk-SNARKS or Zero-Knowledge proofs, Zcash (ZEC) users send tokens without revealing who they are, how much they're sending or who they're sending it to. It's this zk-SNARKs feature that allows the transaction to be validated without sharing any identifiable details.
Stealth Addresses
Among other methods, Monero (XMR) uses a system of stealth addresses to make those sending and receiving transactions entirely anonymous. While employing a more complex dual-key protocol, this tech involves creating a new, password-protected anonymous address for every transaction – a stealth address.
How are privacy coins different from Bitcoin?
There's one key difference between Bitcoin and many privacy coins – a freely explorable public ledger.
All you need to know is a user's wallet address and you can use a blockchain explorer to view every transaction they have ever made on the network as well as the balance of their address.
This public ledger is why Bitcoin is not considered a genuine, privacy coin – and also makes it terrible for money laundering.
Privacy coins compared
With over 60+ privacy coins available, here's a summary of some of the 6 biggest privacy coins on the market at the time of writing.
1. Monero (XMR)
Monero is one of the earliest privacy coins, originating in 2014. With a strong, active community and development team, this open-source project remains one of the most popular and well-known privacy coins on the market. It uses several privacy features to stay untraceable and unlinkable, such as ring signatures, stealth addresses and bulletproofs.
Where to buy Monero2. Dash (DASH)
Often touted as the first privacy coin, Dash (DASH) was initially launched in 2014 as Xcoin before rebranding as Dash or "Digital Cash" in 2015. The technology behind Dash doesn't just scramble transactions from a privacy perspective; it allows for far quicker transactions vs the likes of Bitcoin. This speed could be key to achieving the ambitions of its development team to become a daily alternative to cash, cards, PayPal and Venmo.
Where to buy DASH3. Zcash (ZEC)
Launched from a Bitcoin fork in 2016, Zcash shares many of Bitcoin's core features, including a fixed total supply of 21 million units. Although with added optional security measures, users can conceal their details with shielded addresses hidden from the publicly explorable blockchain. If a user wishes to remain anonymous, they mark a transaction as "private", which hides the sender, the recipient and the amount they're sending.
Where to buy Zcash (ZEC)4. Decred (DCR)
Decred (DCR) was designed by former Bitcoin developers who wanted to overcome some of the issues faced over the years, namely, decision-making on controversial topics like hard forks. Decentralised and self-governing, Decred gives holders a vote on the future of their currency. With privacy and security measures added in 2019, Decred aims to be the most secure and sustainable blockchain in existence. The new privacy implementations are based on CoinShuffle++ technology, which conceals the sender's identity after each transaction.
Where to buy Decred (DCR)5. Verge (XVG)
Originally named DogeCoinDark after the popular meme coin (Doge), this cryptocurrency was rebranded as Verge Currency in 2016. While it does have a freely explorable public ledger for anyone to view wallet balances and any incoming or outgoing transactions, Verge uses The Onion Router TOR (famous for its anonymous browser) and Invisible Internet Project (I2P) technology to conceal the IP address and therefore location and identities of its users.
6. Beam (BEAM)
Created in 2019, Beam is a cryptocurrency project with magical foundations. Its protocol is named after a tongue-tying spell from the Harry Potter collection of books, Mimblewimble (MW). MW is the protocol Beam uses to facilitate confidential transactions. By removing the need for addresses, transaction amounts or a public record of transactions, alongside making transactions private by default, the Beam team aims to make privacy, anonymity and scalability a priority over the coming years.
Where to buy BEAMAre privacy coins legal?
The short answer is yes; they are legal in most countries. As a user, you can hold, send and receive any denomination of private cryptocurrency, but this does depend on where you live. Japan, for example, is one of the few countries to ban privacy coins completely.
On the other hand, some jurisdictions are stamping down on trading these coins on crypto exchanges due to AML (anti-money laundering) rules. Because of this scrutiny, several prominent exchanges such as ShapeShift, Bittrex and CoinSpot have voluntarily chosen to delist privacy coins like Monero and Dash in anticipation of these measures. Alternatively, some exchanges such as Swyftx in Australia claim that local regulators and banks have forced their hand in making the decision to delist privacy coins.
What to consider when buying privacy coins
Just like any cryptocurrency purchase, there are several things to consider before you buy a privacy coin.
- Popular cryptocurrencies like Bitcoin and Ethereum are only partly private; while you don't provide personal details like your name or email address, every transaction can be traced to your wallet and, often, your IP address. However, privacy coins aim to conceal this information with various security measures.
- With over 60 privacy coins available, and a combined market cap above $2 billion, it's important to look beyond the token price and look at things like the technology, the development team and the core focus as a project.
- While some privacy coins may seem similar, they do vary from project to project. Some make scalability a core function, others continue to focus on privacy and others (like DASH) downplay their privacy features in the hope of greater mainstream adoption.
- As of today, privacy coins are legal, but that doesn't mean every country endorses them. The law where you are may well change in the future.
- With potentially more crypto exchanges delisting privacy coins, you may struggle to trade your coins in the future.
Cryptocurrencies aren't regulated in the UK and there's no protection from the Financial Ombudsman or the Financial Services Compensation Scheme. Your capital is at risk. Capital gains tax on profits may apply.
Cryptocurrencies are speculative and investing in them involves significant risks - they're highly volatile, vulnerable to hacking and sensitive to secondary activity. The value of investments can fall as well as rise and you may get back less than you invested. Past performance is no guarantee of future results. This content shouldn't be interpreted as a recommendation to invest. Before you invest, you should get advice and decide whether the potential return outweighs the risks. Finder, or the author, may have holdings in the cryptocurrencies discussed.
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