Monero, which trades under the ticker XMR, is a privacy-oriented digital currency. It has become one of the best-known cryptocurrencies for protecting the identity of users. Further, it has become one of the most dominant cryptocurrencies of the dark web, a marketplace where users can make anonymised transactions.
Just like fiat currencies, digital currencies have their own unique price determinants. For example, fiat currencies are affected by variables like international trade and the strength of varying economies. Cryptocurrencies such as Monero and Bitcoin are based on complex underlying technology, and understanding this technology is crucial for those who are thinking about putting their money into these digital assets.
The Basics Of Monero
Monero is a digital currency that was designed with the aim of helping provide users with privacy. Its own website describes the digital currency as "the leading cryptocurrency with a focus on private and censorship-resistant transactions."
The website states that many digital currencies, for example Ether and Bitcoin, have blockchains that provide significant transparency on user transactions. Monero, however, was designed to help protect the identity of senders and recipients in transactions.
While Monero is not the only well-known privacy oriented digital currency, its transactions are anonymous by default. Zcash, which is another major cryptocurrency designed to provide users with anonymity, does not have this feature.
To help provide users with privacy, Monero leverages Stealth Addresses and Ring Signatures.
A Stealth Address is a one-time address that a sender creates for a recipient. Every time a user sends Monero, he or she is required to establish one of these addresses. Every recipient has a public address. When Monero is sent to that address, the recipient can have the digital currency go to unique addresses on the blockchain. When this takes place, the transactions will not be linked to the recipient's public address, or the address associated with other transactions. As a result, the sender and recipient of the Monero will be the only people who will know the final destination of the cryptocurrency sent.
Ring Signatures help ensure privacy by obscuring the signers of Monero transactions. They are created by taking a user's account keys and combining them with several public keys from Monero's blockchain. All the keys in a completed ring are considered equal, meaning that they could all be used to sign a transaction. As a result, outside observers lack the ability to determine whether any key in question belongs to a specific user.
Academics from the Massachusetts Institute of Technology and The Weizmann Institute were the first to describe the idea of a Ring Signature in a 2001 paper.
In addition to obscuring the identities of senders and recipients, Monero has also implemented an upgrade called RingCT, which permits users to hide the value of transactions. The update was implemented in January 2017, and it became obligatory for all Monero transactions after September of that year.
While a digital currency that makes its transactions private by default may generate suspicion of wrongdoing or illegal activity, Monero users can permit others to view transactions by providing them with a "view key." By supplying this key, a user can allow the holder to look at all incoming transactions associated with a specific address.
However, as of June 2017, a view key cannot be used to accurately peruse outgoing transactions.
One of the major draws of Monero is its fungibility, which means that all units of this digital currency can be substituted for another. Currencies are not always fungible.
For example, some units of Bitcoin can be linked to crimes that took place in the past, such as high-profile hacks. Some industry participants, including exchanges, have made efforts to prevent customers from using these specific bitcoins.
Because units of Monero are untraceable, they all have the same value in the eyes of financial institutions such as exchanges.
Monero Investment Basics
Interested investors can purchase Monero on many exchanges including Bitfinex and Kraken. On these exchanges, investors can trade Monero, which has the ticker symbol XMR, against various fiat currencies including the U.S. dollar, euro and Japanese yen. There are also several exchanges that offer BTC/XMR trading.
One factor that may draw investors to Monero is the robust returns it has produced at some points. In 2016, for example, its price skyrocketed, rising more than 2,700%, according to CoinMarketCap figures. The following year, the cryptocurrency once again enjoyed robust appreciation, climbing more than 2,400%.
Upon enjoying some strong appreciation, Monero outperformed many other asset classes, such as stocks and bonds, during these periods. While Monero has managed to produce strong upside at times, investors should keep in mind that these sharp gains have coincided with significant volatility, which is characteristic of digital currencies.
Volatility can make things more difficult for investors who are interested in long-term planning, as the sharp price movements help increase uncertainty. However, volatility also creates opportunities for traders. If a trader expects that an asset will experience significant price fluctuations, he or she can buy and sell that asset accordingly in an effort to generate compelling returns.
For anyone considering investing in Monero, having a good sense of the digital currency's major price drivers can be quite helpful. One variable that can help influence the cryptocurrency's price is news that illustrates rising adoption, such as when an exchange chooses to list the digital currency.
Several exchanges have added XMR trading, such as Korean exchange Bithumb, which began offering the digital currency in August 2017. Shortly after this news, the digital currency's price reached US$148.36 on CoinMarketCap, its all-time high at the time.
Another example of rising adoption is announcements from dark web marketplaces that they will use the digital currency. For instance, AlphaBay announced in August 2016 that it would accept Monero for transactions. The marketplace's decision to embrace XMR has been cited as a major cause of its sharp price gains in 2016.
Monero prices rose notably in 2016 and 2017, which is when the digital currency markets drew significant interest and sharp inflows. During the latter year, for example, the total market value of cryptocurrencies rose more than 3,000%, climbing from roughly US$17.7 billion at the start of 2017 to more than US$600 billion at the end.
However, the value of this broader cryptocurrency market dropped sharply the next year, falling to less than US$250 billion in April 2018.
In addition to their high volatility, digital currencies have had less time to develop market history than many other assets, only achieving widespread adoption in the last decade. The first units of bitcoin, the first digital currency to scale, came into existence in January 2009.
Because cryptocurrencies are so new relative to other assets, they are more uncertain. Investors looking to trade stocks and bonds, for example, have far more historical data to leverage than those interested in digital currencies.
A Speculative Investment
Investors should keep in mind that digital currencies like Monero are speculative investments. Cryptocurrencies do not generate revenue or profits, for example, and as a result, it is impossible for traders to calculate a price-earnings ratio for one of these digital assets. Further, cryptocurrencies do not provide interest payments like bonds, which would be another fundamental indicator that analysts could use to determine what they are worth.
When evaluating digital currencies, investors can potentially look to other fundamental indicators, such as network size or transaction volume, in an effort to determine what these cryptocurrencies should, in fact, be worth.
Investors should bear in mind that many market experts have criticised digital currencies and questioned the basis for their value. Jack Bogle, who founded financial institution Vanguard and is considered the creator of the index fund, has been vocal about his doubts surrounding Bitcoin. He said, "There is nothing to support Bitcoin except the hope that you will sell it to someone for more than you paid for it."
Some market observers have voiced concerns that cryptocurrencies have entered bubble territory at points. Nouriel Roubini, an economics professor at New York University, called Bitcoin "the mother of all bubbles" in early 2018.
Cryptocurrencies like Monero have drawn interest from investors, attracting robust inflows and as a result experiencing some very sharp gains at times.
However, Monero is a speculative investment, and it has experienced significant volatility at some points. While traders may be drawn to Monero because of its ability to grant users privacy, its high profile or the substantial returns it has produced, they should be sure to conduct thorough due diligence before buying, selling or otherwise investing in this digital currency.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…