Big Investment Theme #1 For 2017: Privacy And Fungibility

One of our big misses here at in 2016 was Monero. We missed Monero because we failed to recognize the value of privacy. More specifically, we failed to recognize how valuable privacy is for investors. I’ve recognized that privacy is the foundation for a free society for a long time.

Post Snowden, encryption and decentralization are one of the few defenses we have as individuals against the rise of an Orwellian society. The battle for freedom against tyranny will be won on the technological front, not the political one. However, it didn’t dawn on me that this was an investable idea until last year when Monero exploded.

I should’ve recognized that privacy was the first actual use case for Bitcoin. We know today Bitcoin isn’t private and transactions can be traced, but in 2011 it was private enough, and certainly more private than any other online payment method at the time.

The first reason Bitcoin was used for real world transactions at scale instead of PayPal or credit cards, was to pay over the Internet without handing over identity; specifically to pay on Silk Road. Let’s look at how Bitcoin traded from the beginning of Silk Road in February 2011 to the end of 2011.

The launch of Silk Road was Bitcoin’s first real world use case and propelled the price to over $30 from 50-85 cents. As Silk Road continued to gain transaction, Bitcoin’s price and market cap continued to rise. Here is a chart from January 2012 till October 7th 2013. Silk Road was shut down and Ulbricht arrest on October 2, 2013:

On the day Silk Road was shut down, Bitcoin’s price crashed:

Bitcoin’s Crash when Silk Road was shut down




I would argue the first $100-$200 (first couple billion dollars of market cap) of Bitcoin was driven primarily from Silk Road. What does that imply about the value of privacy? Privacy for JUST buying drugs on online ALONE is potentially worth AT LEAST $2 billion. What I’ve presented isn’t proof, but I would argue enough circumstantial evidence for an investment thesis.
Bitcoin entered mainstream consciousness around 2012 when articles in well known publications started appearing. Debate raged over whether Bitcoin had any intrinsic value, was Bitcoin money, was Bitcoin a bubble, is Bitcoin like the tulip bubble, etc.
The existence of Silk Road should’ve made these discussions irrelevant. According to the gov’t, Silk Road generated over US$1.2 billion in revenue, $80 million in profit for Silk Road, over 1.2 million transactions, for 146,000 buyers, and nearly 4000 vendors.
Any currency supporting over a billion dollars of commerce for hundreds of thousands of people, and is accepted as payment by dozens of well known corporations has value. Regardless of your ideology, political views, or school of economic theory, Bitcoin proved it has fundamental value on the existence of Silk Road alone.
Even after Silk Road was shut down, it would’ve been naive to assume another dark net wouldn’t immediately take its place, and they wouldn’t also use Bitcoin because of its existing user base.
I don’t condone illegal drug trafficking, but the fact is the drug business, both legal and illegal is a multi trillion dollar market. What is potential market value of a currency used for EVERY REASON a person would want a private transaction?
I would argue hundreds of billions of dollars because privacy is a fundamental human right. While I can’t say exactly how much the privacy is worth, I can say it’s worth several orders of magnitude more than any of the privacy focused projects that currently exist. It’s at least $2 billion for drugs alone.
Therefore, one of the new areas of focus here at are the leading privacy projects such as Monero and Zcash.
Privacy was Bitcoin’s first killer use case for buying drugs on Silk Road. It’s still a killer use case because people still want to buy drugs anonymously. But Bitcoin’s development is no longer focused on privacy focused and may give an opening to projects that are.
FUNGIBILITY is the key for privacy for a cryptocurrency. Every coin must be indistinguishable from every other coin. This is not the case for Bitcoin because there is a complete historical record of every Satoshi to the day it was mined on its blockchain. That will never change. Bitcoins will never be entirely fungible for this reason.
While there are ways to preserve your privacy with Bitcoin, it’s a constant battle to obscure transaction history because of its fundamental design. This is an opportunity for other currencies specifically focused on privacy to take the lead over Bitcoin in this area.
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2 Responses

  1. Thank you, Leon Fu, for this informative article. I follow cryptocurrency. market and really appreciate the life changing info. Will you at some stage write to your subscribers giving advice on valuable ICO’s for us to invest in, this will be very helpful because we all don’t have the skill to evaluate ICO’s.

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