March 22 (Reuters) - Bitcoin is simply not anonymous enough for a growing cohort of cryptocurrency users seeking greater seclusion.
A volatile class of crypto known as privacy coins, created with the primary goal of masking user identities and transaction details, has been quietly gaining traction this month as bitcoin moves into mainstream finance.
Monero and Zcash, among the most popular, have respectively gained 7.6% and 46% since March 1, according to data from CoinMarketCap, although bitcoin has lost around 5%.
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The pair has gained 4.7% and 16% in the last week. An index that tracks privacy coins more broadly, compiled by research firm Macro Hive, is up 4%.
This could be a problem in the wild ride of privacy coins, which hide more information about transaction amounts and parties through differences in their underlying blockchains.
In the past five years, Monero's market capitalization โ the total value of all coins in existence โ has skyrocketed from $100 million to $6.8 billion to $3.4 billion now, according to data from CoinMarketCap.
However, the interest in crypto privacy coincides with the decline of bitcoin's role as an anonymous currency. It also comes against the backdrop of the war in Europe, a roundup of tougher sanctions, and loud noises from lawmakers in the US, EU, and Japan about regulating the crypto market.
Aidan Arasasingham and Gerard DiPippo of the Washington-based Center for Strategic and International Studies point out that bitcoin is not truly anonymous, but rather pseudonymous, where coins can be held in open wallets under alternative or fake names.
"If a wallet can be linked to an entity or person, the actor can be identified," they wrote in a report in the context of the possibility of cryptocurrencies being used in Russia and Ukraine to move funds. "Your transactions and wallets can be traced."
However, volatility aside, there are several hurdles that prevent privacy coins from being a top-tier altcoin, or alternative to bitcoin, which has a market cap of around $776 billion.
Some of the major crypto exchanges do not list privacy coins due to their potential for illicit activity, for example. Monero's daily trading volumes have been mostly below $250 million this month, while altcoin Ripple sees more than $1.5 billion changing hands each day.
"Privacy coins are likely to grow. The challenge is that you have to do a lot of things to make them anonymous that lead to a horrible user experience and add huge transaction costs," said Dave Siemer, CEO of asset management firm Wave Financial. in Los Angeles. Angeles who owns some Monero coins.
TRACKING THE LAST SATOSHI
Privacy coins have evolved in recent years as the ability for authorities to track blockchain activity for bitcoin and other major cryptocurrencies has become more advanced.
"Coins can, with a little effort, be traced back to the last 'satoshi,' the smallest unit of bitcoin," Teunis Brosens, chief economist for digital finance and regulation at ING, said in a note.
โRecent reports of ransomware money recovery and arrests made for hacking crypto exchanges made years ago attest to this progress.โ
Big regulators have the crypto market in their sights, with efforts intensified by concerns that Russian oligarchs and other sanctioned individuals could use bitcoin to move money clandestinely.
US senators have introduced a bill that could give the president the power to sanction foreign crypto companies. The European Union has also voted in favor of comprehensive legislation on digital assets. Japan's Financial Services Agency has said it will punish anyone who makes unauthorized payments to people targeted by the sanctions. Read more
SO HOW DOES BITCOIN TRADE?
Bitcoin's movements have been contained in part by the Ukraine conflict and the aggressive attitude of the Federal Reserve.
The crypto kingpin has been stuck between $35,000 and $45,000 since mid-January, failing to reach the $50,000 level he was at at the end of 2021. The ratio of bitcoin long to short positions on Binance is 1.5 , the same level in which it was. on February 24 when Russia invaded.
Meanwhile, data from Glassnode shows a jump in the proportion of the bitcoin supply absorbed by entities with a low statistical spending history.
Marcus Sotiriou, an analyst at UK-based digital asset broker GlobalBlock, sees this as "suggestive of a medium to long-term bull market structure."
โBitcoin is consolidating below $41,000 as the percentage of long-term holders in the market continues to rise,โ Sotiriou said.
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Reporting by Lisa Pauline Mattackal and Bansari Mayur Kamdar in Bangalore; Edited by Vidya Ranganathan and Pravin Char
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