Zcash, which trades under the ticker symbol ZEC, is a privacy-oriented digital currency that leverages bleeding-edge cryptography to shield the identities of users. By using this innovative technology, Zcash has become one of the most highly visible cryptocurrencies used to provide anonymity.
While Zcash certainly has rivals, some believe that this altcoin is the best digital currency for providing its users with privacy. Users have been flocking to Zcash amid concerns about Bitcoin's ability to keep its users anonymous.
The Basics Of Zcash
Zcash is a digital currency that leverages zero-knowledge proofs called zk-SNARKs to obscure the identity of users. These proofs allow users to verify transactions without disclosing their identity or the amount exchanged.
Like many other digital currencies, Zcash records all of its transactions on a public blockchain. However, Zcash's digital ledger has the ability to obscure the identity of the sender and recipient, as well as the amount being sent in any transaction.
Zcash has both shielded and transparent addresses, with the latter type of address functioning exactly like a bitcoin address. The shielded addresses start with the letter z, and the transparent ones begin with a t.
Shielded addresses require greater resources than transparent addresses. More specifically, executing encrypted transactions using Zcash can be quite costly in terms of the time and memory needed. An article written in July 2017 stated that carrying out one of these private transactions required more than 3 gigabytes of random access memory (RAM) and an average of 40 seconds.
Further, several articles have been written about how the majority of Zcash transactions involve transparent addresses. Data sources have provided varying estimates of exactly what portion of ZEC transactions are shielded. According to website Zchain, roughly 13.9% of these transactions were private at the time of this writing.
Zcash was launched on 28 October 2016, when the genesis block was mined and the digital currency was first listed on exchanges. At the time of report, Zcash was a top 30 digital currency by market capitalisation, holding the number 28 spot on CoinMarketCap.
The privacy-oriented digital currency was created as a result of cryptographers who made repeated efforts to offer users greater anonymity. Zcash's roots go back to 2013, when four people working for the Johns Hopkins University Department of Computer Science created something called Zerocoin in an effort to provide a digital currency that offered users greater privacy than bitcoin, which had benefited from "widespread adoption."
These four individuals emphasized that while bitcoin had generated progress in terms of gaining the acceptance of many users, the digital currency offered little in the way of privacy, including these statements in the abstract of a paper they wrote about Zerocoin.
The abstract described this new digital currency as a "cryptographic extension to Bitcoin that augments the protocol to allow for fully anonymous currency transactions."
Later on, the four individuals who created Zerocoin worked with cryptographers from the Massachusetts Institute of Technology, Tel Aviv University and the Technion to create a new protocol called Zerocash. This new protocol, which built upon and improved the Zerocoin protocol, obscured the sender, recipient and amount involved in transactions.
Later on, Zooko Wilcox, a highly visible technology entrepreneur, as well as his team members at online storage company Least Authority, began transitioning Zerocash to Zcash.
One of the major benefits offered by Zcash is fungibility, which refers to the ease with which one unit of a currency can be exchanged for another. Differing units of digital currency do not always have the same level of fungibility.
Certain units of Bitcoin, for example, have been flagged as being associated with illegal activities such as theft and hacking. Some organisations, such as exchanges, have responded to this situation by attempting to prevent the use of certain units of Bitcoin.
By offering a high level of privacy for its users, Zcash can serve as a very fungible digital currency.
Criticisms of Zcash
Market observers have provided several criticisms of Zcash that have targeted its underlying technology and that it may not be as decentralised as many digital currency advocates would want it to be.
Digital currencies are generally decentralised, meaning that they are not run or operated by any central authority, and this quality has come to be synonymous in many cases with cryptocurrency.
In the case of Zcash, a central entity (the Zcash Company), has taken point on the development of the digital currency's protocol, its underlying science and the reference client. The Zcash Foundation was created with the purpose of carrying on this work over the long-term and overseeing the development of the Zcash protocol. Wilcox announced this foundation in March 2017, revealing that it would be funded through donations.
While the creation of both the Zcash Company and the Zcash Foundation might be seen by some as a socially beneficial development, this centralisation of management and leadership has provoked the ire of many industry participants. Some digital currency advocates and developers have said that this centralisation makes Zcash vulnerable to government entities such as law enforcement agencies. As a result, some have referred to Zcash as "corporate coin."
Industry participants have also been critical of the "ceremony" that coincided with the creation of Zcash. In order for the currency's private transactions to take place, SNARK public parameters needed to be created, which were in turn used to create and then verify zero-knowledge proofs.
Developing these SNARK parameters was similar to creating a private/public keypair, eliminating the private key and then keeping the public key. Should the private key fall into the wrong hands, one or more nefarious parties could use it to create counterfeit units of Zcash.
Six individuals each created a portion of the public key, known as a shard, using their portion of the corresponding private key. They then created the public key parameters using these shards, before destroying them.
Those six individuals involved in this ceremony were members of the Zcash Company. As a result, they can be thought of as key points of vulnerability. If outside actors were able to compromise the company, they could obtain the shards and use them to create counterfeit Zcash.
Zcash Investment Basics
Interested investors can purchase Zcash on many different exchanges and trade this altcoin against both fiat currencies, including the U.S. dollar and euro, and digital currencies such as Bitcoin and Ether. Kraken, Bitfinex and Poloniex all offered Zcash trading at the time of this writing.
Zcash has experienced some sharp price gains at times, with the ZEC/USD currency pair rising to nearly US$6,000 shortly after the currency went live on exchanges. During 2017, the digital currency gained more than 900%.
Because of this sharp appreciation, Zcash was able to outperform many other asset classes, such as stocks and bonds. While the digital currency has managed to generate some rather compelling gains, investors should keep in mind that this upside has coincided with substantial volatility.
While Zcash climbed to almost US$6,000 right around when it began trading on exchanges, it also dropped drastically and landed at around US$70 per coin in November 2016.
Risk is inherent to investment, and no one knows for certain what tomorrow will bring for the global asset markets. Of course, this makes it impossible to know how a specific asset, such as a digital currency like Zcash, will perform further down the line. As a result, investors who are looking to incorporate Zcash in to a portfolio should keep this uncertainty in mind.
On the other hand, volatility has its benefits, as it creates opportunities for traders. If a trader believes that an asset will undergo notable price fluctuations, he or she can leverage this information to buy or sell that asset in an attempt to turn a profit. Investors who are considering trading Zcash can benefit substantially from obtaining a sense of which key variables drive the currency's price movements.
At the most basic level, the price of any asset is a function of supply and demand. Delving a little further, the supply of Zcash is the total number of units outstanding, and here are some important notes to remember:
- There are roughly 3.7 million ZEC in circulation at the time of this writing.
- New units of ZEC are constantly being added to the system every time a new block is mined, which is currently once every 2.5 minutes.
- Every time miners complete one of these blocks, 12.5 ZEC are added to the total supply.
- Roughly once every four years, the system experiences a halving, which results in the mining reward being cut in half.
While the total supply of ZEC has been set up to increase at a decreasing rate, the supply is capped at 21 million units of the digital currency. This helps make the supply situation surrounding this digital currency more certain than that of a fiat currency, as the central bank issuing the fiat currency could always print additional units.
As for the demand the market has for ZEC, several factors help drive this key variable and they are as follows.
One major factor driving the price movements of Zcash is adoption. The cryptocurrency has been growing increasingly popular on the dark web, where people can make anonymous transactions, according to a recent report released by European law enforcement agency Europol.
According to this document, named the Internet Organized Crime Threat Assessment (IOCTA), Bitcoin is the number one digital currency used on the dark web, but other cryptocurrencies have been becoming increasingly popular.
Another variable that can have a significant impact on the price of Zcash is media hype. While Zcash has been available for trade on exchanges for less than two years, the altcoin has drawn significant attention in that time.
The following year, Zcash once again received coverage from several major media outlets. NPR's Radiolab recorded a podcast about the ceremony used to create Zcash, while Fortune wrote an article featuring the privacy-oriented digital currency.
Another development that could be cited as driving Zcash's sharp price fluctuations is the interest of market participants. When the digital currency first started trading on exchanges, its price quickly reached an all-time high.
Tim Enneking, a digital currency hedge fund manager who runs Crypto Asset Management, spoke to all the enthusiasm surrounding ZEC's price movement by referring to it as "crazy."
When Zcash climbed sharply in 2017, it did so at the same time that the broader cryptocurrency experienced a substantial increase in value. That year, the total value of the digital currency market rose more than 3,000%, climbing from roughly US$17.7 billion to more than US$600 billion.
While the broader cryptocurrency market skyrocketed in value during 2017, it fell sharply the next year and declined to less than US$250 billion.
Another major source of demand for the privacy oriented digital currency is investors who buy the altcoin. These individuals have the ability to buy Zcash through several different exchanges.
A Speculative Investment
Traders who are thinking about getting involved with cryptocurrencies like Zcash should keep in mind that these digital assets are speculative assets. And because digital assets do not produce revenue or earnings, it is impossible to calculate key valuation metrics, for example a price-earnings ratio Also, cryptocurrencies do not make interest payments like bonds, which would otherwise provide another fundamental indicator that could possibly be used for valuing these digital assets.
When conducting research on cryptocurrencies, potential investors should look to other fundamental indicators, for example transaction volume or network size, in order to get a better sense of what a digital asset is "worth."
Investors should also keep in mind that while cryptocurrencies have at times provided investors with some very compelling returns, these digital assets have not been around for very long. At the time of this writing, Bitcoin has been in existence since only January 2009.
As a result, would-be investors have less history they can look to compared to more established asset classes such as stocks and bonds, which have a far greater history to consider and research.
While some potential investors may find cryptocurrency's lack of history concerning, there are other factors to keep in mind. For example, several prominent analysts have voiced their doubts about digital currencies.
- JPMorgan Chase CEO Jamie Dimon described Bitcoin as a "fraud" and said that "it's worse than tulip bulbs" and "won't end well."
- Robert Shiller, an American Nobel Laureate and Yale professor, has appeared skeptical of Bitcoin. He said, "I think that the value of bitcoin is exceptionally ambiguous." He continued: "There is the medium of exchange function that it's offering, and there's also a store of value function; that is, you can hide away your wealth in there. And it's mobile; you can go anywhere, and get at it. How valuable is that, though? I don't personally see any value to that."
Digital currencies like Zcash have attracted significant interest from investors, causing them to enjoy some very impressive price increases.
However, investors should remember that Zcash is a speculative investment, and it has experienced very sharp price fluctuations at times. While potential traders may find Zcash appealing because of its innovative technology, they should be sure to perform 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…