First things first: Why use cryptocurrencies at all?
Cryptocurrencies allow fast, inexpensive payments to and from anywhere in the world. There are no wire transfer or check clearing fees, no multi-day holding periods, and no risk of fraudulent chargebacks. Due to lack of centralised control, cryptocurrencies cannot be shut down by any one country. Cryptocurrencies are safe from ‘capital controls’, which are measures that restrict the flow of currencies, sometimes to an extreme degree during financial panics.
This Economist magazine article describes how people in Greece were restricted to accessing only 60 Euros per day during their crisis – holders of cryptocurrencies were saved from this fate.
The IMF in 2015 published a table of 100 countries, of which 48% had some form of capital controls on at least 10% of transaction categories (IMF publication page 15). Even for currencies described as being ‘open’, there are huge variations around the world for the time required for the opening of a bank account to be approved. Simple wire transfers can take a minimum of several days even between high income developed countries. A check written in the US and deposited in a UK bank with a value of over $10,000 can routinely take three months to clear. In additional to capital controls, there are currency controls which restrict the free use or exchange of currencies.
With very short notice, India recently declared that 86% of all the cash in circulation would soon no longer be considered legal tender. The European Central Bank has announced it will be phasing out the 500 Euro bank note, and Australia has proposed a ban on the $100 bill.
At the time of writing, Denmark, Japan, Sweden and Switzerland have implemented negative interest rates, which means that if you hold their currencies in a bank account instead of as cash, the bank can charge you interest instead of paying you interest!
While cryptocurrencies are making rapid progress in becoming more useful and convenient, there is a war on cash and deposits which are making traditional currencies increasingly less useful.
Valuing a cryptocurrency
Valuing a cryptocurrency is difficult. Similar to metals such as copper or silver, cryptocurrencies do not pay a dividend.
Copper has value because people are expected to need it on an ongoing basis for industrial purposes. Cryptocurrencies are considered to have value because people are expected to need them to store/send/receive payment in situations where traditional currencies are unsuitable, impractical, restricted or incur uncompetitive fees.
It is true that if everyone stopped using any particular cryptocurrency, it would lose its value. This is similar in nature to social networks such as Facebook: Facebook would lose all value if everyone suddenly stopped using it and switched to a competitor. However, owners of Facebook stock can sleep at night secure in the knowledge that the inconveniences of switching to a competitor are high enough that this can only happen gradually. This is a concept known as the network effect.
Some would argue that all cryptocurrencies are worthless because infinite clones of Monero or Bitcoin could be created. There is nothing to prevent anyone from creating a Monero clone and calling it NeoMonero. But the point is that the network effect of users adopting the original Monero and not the clone is what gives Monero coins scarcity compared to the coins of a clone. A clone of Facebook or eBay would be useless because everyone is already using the original. Scarcity therefore comes not only from the unique features of a particular cryptocurrency, but also from the user adoption of that cryptocurrency.
Once a currency gets started, it starts to develop a degree of stability based on past expectations of its purchasing power. This is a concept familiar to economists and is known as the Regression theory of money. For further reading about how the regression theory applies to cryptocurrencies, see this Mises Institute article.
How can Monero compete with Bitcoin’s network effect?
Other social networks existed before Facebook, and they were protected by their own network effects. Facebook did not need to overcome those network effects in order to win. All it had to do is stand out as a clearly superior product during a period in time when enormous numbers of people were starting to use a social network for the very first time. New users have no switching costs, because they are not already using a competitor.
We believe that Monero is a superior product, which has come along at the right time in history when massive new adoption of cryptocurrencies is about to occur.
Roger Ver, known as “Bitcoin Jesus” for his evangelical support of the currency during its early years… said his investment in Monero is “substantial” and his biggest in any virtual currency since bitcoin.
Source: Bloomberg
Why might Monero see greater future adoption than Bitcoin?
The most critical flaw in Bitcoin is its lack of privacy. If you give me your Bitcoin wallet address so that I can send you a payment, you immediately compromise your privacy. I can see as a matter of public record how much money you have in your Bitcoin wallet (there are messy workarounds to attempt to fix this problem, which we will address shortly). The same situation applies even if you are the one sending Bitcoin. Any recipient can then see how much money you have in your Bitcoin wallet, both now and in perpetuity. To understand how critical this privacy problem is, consider the following scenarios:
You are travelling through parts of a country with a medium to high violent crime rate. You need to use some of your Bitcoin to pay for something. If every person you transact with knows exactly how much money you have, this is a threat to your personal physical safety.
You are a business that receives a payment from a supplier. That supplier will be able to see how much money your business has, and therefore can guess at how price sensitive you are in future negotiations. They can see every single other payment you’ve ever received to that Bitcoin address, and therefore determine what other suppliers you are dealing with and how much you are paying those suppliers. They may be able to roughly determine how many customers you have and how much you charge your customers. This is commercially sensitive information that damages your negotiating position enough to cause you relative financial loss.
You are a private citizen paying for online goods and services. You are aware that it is common practice for companies to attempt to use ‘price discrimination’ algorithms to attempt to determine the highest prices they can offer future services to you at, and you would prefer they do not have the information advantage of knowing how much you spend and where you spend it.
You sell cupcakes and receive Bitcoin as payment. It turns out that someone who owned that Bitcoin before you was involved in criminal activity. Now you are worried that you have become a suspect in a criminal case, because the movement of funds to you is a matter of public record. You are also worried that certain Bitcoins that you thought you owned will be considered ‘tainted’ and that others will refuse to accept them as payment.
Monero solves these privacy issues by automatically applying privacy techniques to every single transaction made. You can have confidence that it is not possible to own ‘tainted’ Monero. This is a concept in economics known as ‘fungibility’ and is historically considered an important characteristic for any currency to have.
The Bitcoin community has attempted to solve these problems by introducing ‘mixing’ features. Their solutions have been described as ‘a band aid over a stab wound’. A more detailed explanation can be found here.
Because everyone that uses Monero automatically has privacy features applied to their transactions, Monero has a huge advantage over other cryptocurrencies whose privacy features are only optional. You never have to request and then verify whether other people have enabled a privacy mechanism when sending you funds, because privacy is always automatically applied to all transactions. Furthermore, the always-on nature of Monero’s privacy features means that even if the majority of Monero users are not privacy sensitive, they will still automatically participate with the strengthening of the privacy mechanisms for other users that are privacy conscious.
We believe the closest competing cryptocurrency to Monero is something called ZCash. ZCash uses a new development in cryptography known as ‘zero knowledge proofs’. The computational burden involved in creating such transactions is so great that it would take a smartphone over 20 minutes to initiate just a single ZCash transaction. This forces the ZCash developers to make their privacy features optional. Most ZCash transactions are expected to lack privacy. This adversely affects the ZCash users that are concerned about their privacy, because their activity is concealed among only a small subset of ZCash users that have the private transaction features enabled. What’s the point of being anonymous within a crowd if that crowd is only very small and the people in that crowd are only temporarily turning up when they have something to hide?
More troubling, the cryptographic concepts involved are so brand new to the mathematics community that it could take two decades before we can really have confidence that there are not fundamentally critical security problems with their approach. It is for that reason that we consider Monero to have the best chance of succeeding vs other competing cryptocurrencies, because it uses far more established and tested cryptographic practices.
Five other major advantages of Monero over Bitcoin
- Monero’s superior mining algorithm
‘Mining’ is the name given to running a program on a computer which verifies and processes the cryptocurrency transactions that other people announce to the worldwide network. We believe the creators of Bitcoin chose poorly when it came to their mining algorithm. The Bitcoin algorithm runs dramatically faster on custom made mining chips (known as ASICs) than on standard PCs and laptops. This means it is almost completely pointless for any ordinary computer user to attempt to participate in the mining process for Bitcoin, and leads to a relative concentration of miners in countries with the cheapest electricity costs. In contrast, the Monero mining algorithm was specifically designed such that ASICs will not have too much of an advantage over ordinary computers owned by the general public.
This means people all over the world will be leaving mining software running on their home or work PCs. Those that do this will earn Monero in exchange for running the software that processes and verifies other Monero transactions. Therefore, if someone else is paying the electricity bill (e.g. an employer or university housing complex), then there will be a financial incentive for people to mine Monero using the spare capacity of the computers they already have access to. Far more people will be willing to casually use existing computers for this task than there would if they would need to purchase and install purpose built ASIC mining hardware. Because no special mining equipment is required, it means that it would be easy for anyone that downloads a Monero wallet to simply click a single button to start mining on their computer.
Because we predict a dramatically larger number of people participating in the Monero mining network vs Bitcoin, an important consequence will be that ordinary people who are interested in Monero will be able to earn their first little bit of Monero by participating in the mining process. This is a major marketing win, as it distributes Monero to the broadest possible number of participants to fuel their enthusiasm.
- Monero’s ‘Adaptive block size limit’
When transactions are announced to the Monero or Bitcoin networks, they appear as part of a ‘block’. Monero blocks are produced on average every 2 minutes, and Bitcoin blocks are produced on average every 10 minutes. Blocks have a maximum size, so if there is no room then your transaction will be delayed. If you are desperate to have your transaction included in a block promptly, you will have to increase the transaction fees that you pay to the network.
Bitcoin is in turmoil at the time of writing over an argument about whether to increase the Bitcoin block size. Bitcoin blocks are frequently completely full, causing transactions to be delayed and fees to increase. For more information, see this article: Bitcoin’s Block Size Debate is Back (And It Might Be Worse Than Ever)
Monero has been designed from the beginning to have an automatically adaptive block size limit, which means it will automatically be able to handle future increases in transaction volume without this argument arising.
- Increased likeliness of support for microtransactions
To support ‘microtransactions’, Bitcoin and Monero will need to support systems like the ‘Lightning network’ in order to radically reduce the cost of small payments in the future. Monero has an advantage here over Bitcoin, because Bitcoin would need to support a technology called ‘SegWit’ to allow for micropayments, and there is an argument in the Bitcoin community that could prevent Bitcoin from adopting SegWit. See this article: Segwit won’t happen, says influential Chinese Bitcoin investor
- An impressive integration of the ‘invisible internet project’ I2P layer into Monero is in development
This will add even greater privacy protections when transacting in Monero. I2P will protect you from passive network monitoring, so that not only are your payments untraceable, but people snooping the network cannot tell you are even using Monero at all.
- The quality of the development and research team behind Monero and their design goals are seriously impressive
There are over 180 contributors to the Monero project. See the Monero design goals roadmap here.
Price target
As a mid to long term target, we are optimistic that Monero can surpass the market capitalization of Bitcoin (the combined value of all coins in circulation). Frequently updated comparisons of the market caps of Bitcoin and Monero can be found on our homepage. In the short to mid term, we believe Monero should at least be able to quickly reach the status of the world’s #2 cryptocurrency (excluding Ethereum, whose primary purpose is not as currency).
Please remember, cryptocurrencies are currently extremely risky investments and our enthusiasm biases our reasoning. This essay does not constitute investment advice and may contain errors or omissions. Do your own thorough research before proceeding. Remember to diversify your investable assets. In no event should you allocate more than 1% of your liquid net worth into Monero, as this would leave you too exposed to volatility while Monero matures. If the price of Monero drops precipitously and this would spoil your day, then Monero is not for you at this time.
Note: The author of this article had no significant involvement with Monero prior to November 2016. Therefore the author’s enthusiasm for Monero has been established because of Monero’s merits rather than because of any long standing ties with the project.