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Who needs Privacy anyway?

By Kenetic Trading on The Capital

This week in Crypto

Bitcoin is consolidating above our target of $9,200 with the market sentiment staying bullish and the macro picture favorable. Although we won’t complain if we see a bullish continuation upwards, a brief pullback to the 200d Moving Average would be a healthy signal, before we properly breach the psychologically important $10,000 level. Should prices move meaningfully above $10,000 we expect increased media interest going into the May block rewards halving to add sufficient momentum for a retest of $13,850 — last year’s high

Bitcoin market dominance (by market cap) has been noticeably falling in recent weeks, down to 65% from the high of 72% last year, as traders take profits and cycle them into altcoins. We are far from ‘alt season’ but we are seeing some of the more established projects perform well against BTC. For example, ETH/BTC has seen a 23% increase since the start of the year and exploded above the 200 days moving average at the start of February which will be the main driver behind the decline in Bitcoin’s market dominance.

ETH/BTC 1 year chart
BTC market dominance

With ETH trading above $200 and total USD value locked up across Defi (decentralized finance) projects close to $1Bn, there is a strong likelihood that ETH continues to extend its gains against both BTC and the dollar.

Looking ahead, new money coming into the market should support Bitcoin dominance above 60%, especially in the lead up to the block reward halving. From a trading perspective, we are looking for further buying opportunities on any pullback as our confidence is growing that the market is well supported here and the risk is to the upside. At current prices, our high yielding 3 month Cryptocurrency Conversion Contract with entry prices in the low $8Ks makes a lot of sense given current market conditions and technical setup.

Privacy

In previous weeklies, we have discussed the concerning rise of surveillance capitalism, as cash continues to be phased out around the world and replaced with digital versions of state-issued currency. The startling urgency by which governments are moving in this direction can be easily observed, as new laws are implemented and penalties imposed across the world to make cash purchases above certain amounts either prohibitively costly or outright illegal.

In many developed countries around the world now, the use of cash in daily life is slowly being phased out. You must use certain payment providers and debit/credit cards, both of which funnel all the data up to big brother to be collected, stored and analyzed. But for what purpose exactly? This level of surveillance is normally justified under the guise of public protection from terrorists or money launderers and criminals, tax evaders and other nefarious actors. It is in the public interest to not use cash and expose all of your spending habits to the central authorities…so we are told.

Should you wish to withdraw physical cash from ATM machines in many cities now, the charges are painful — this is a quasi-tax on the use of physical cash pushing the population towards electronic (read, traceable) payment mechanisms.

As we go deeper into the digital revolution and usher in the era of cryptocurrencies, whilst simultaneously attempting to de-monopolize the state control of currency issuance, it is important to reflect on why we are doing all this. The primary goal of cryptocurrencies is not simply to just re-create a new financial system that has the same surveillance, privacy, and control problems so evident in the central bank issued fiat currency world we currently live in.

Privacy is central to this argument and is often lost in all the noise of crypto profits and opportunity.

Edward Snowden: “Arguing that you don’t care about the right to privacy because you have nothing to hide is no different than saying you don’t care about free speech because you have nothing to say.” “When you say, ‘I have nothing to hide,’ you’re saying, ‘I don’t care about this right.

Whether you like him or not, Snowden has a point. Many of us in the west, do not fully appreciate the liberties and freedom that we enjoy — freedoms that a large swathe of the world’s population can only dream of. The ability to remain anonymous if one wants to, is one of the most valuable (and least understood) liberties that citizens in developed democratic nations enjoy. A large majority of these citizens simply do not appreciate the erosion of their privacy that is occurring on a daily basis, despite the staggering and ever-growing scale of social and financial surveillance.

Take a look at what happened with Facebook and the Trump campaign or the social credit scoring in China for a grave reminder.

Despite what many think, the Bitcoin protocol and user interaction is not private by default. Bitcoin is pseudonymous, meaning transactions are permanently recorded on the blockchain for anyone and everyone to see, with each transaction associated with a specific wallet address. If these wallets can be linked to an individual or company then information concerning the transaction and balances of these wallets is available.

For example, a Bitcoin wealthy individual wishes to buy a questionable (but legal) product from a vendor with Bitcoin. Their Bitcoin was previously bought from an exchange or broker that requested KYC to identify that person. This now poses a privacy and security risk because if the exchange or broker becomes compromised, gets hacked or a Government forces disclosure, then the users can be identified, with their linked wallets, historical transactions, and balances all exposed to the public and the authorities.

This is the fundamental conflict with public blockchains such as Bitcoin…the world benefits from information that is decentralized with no trusted third party holding the power and authority over the transaction data, but should you wish to interact with the public blockchain then the point of interaction is a risk to your privacy.

The Bitcoin community is acutely aware of the aforementioned privacy issues, with several protocol upgrades currently being proposed that start to address some of these concerns. The much anticipated Taproot/Schnoor soft fork has now been formally proposed to the Bitcoin community to decide if it should be integrated into the protocol later this year. Consensus is expected to be achieved.

Although highly technical in nature, this upgrade will allow transactions, whether they are peer-to-peer, lightening channels closing or multi-user complex smart contacts, to all look the same when viewing the blockchain. User types are hidden behind the transaction outputs that will be merged together. This is a significant development and allows privacy and scale to be increased significantly at a protocol layer.

What is unclear, is how governments and regulators will view this. If public blockchains like Bitcoin are becoming more anonymous, we expect the restrictions and pressure from the state to heat up. And we have a glimpse of this already…..

Currently if users wish to protect their data (of how, when and where they use and spend Bitcoin), then they can ‘mix’ their coins using CoinJoin. The outcome of this process makes any analysis impossible to determine with certainty which input (unspent utxo) is related to its corresponding output (new unspent utxo) of a Bitcoin transaction. I.e. if James is sending Sarah some Bitcoin, this link is now hidden if a CoinJoin provider is placed in the middle.

@Martybent, @Matt_odel are excellent in their detailed coverage of this subject. As is pseudonymous bitcoiner 6102.

There are several prominent mixing services which are now under the spotlight of a compliance push from exchanges and other centralized crypto service providers, likely initiated by Governments in light of the PlusToken Ponzi.

Wasabi and Whirlpool are the most popular and recently we have seen exchanges refuse, halt or question users if they are sending or withdrawing Bitcoin to one of these mixer/CoinJoin services. Even when users have added several ‘’hops’’ between exchange and mixer, these transactions are being flagged. To break this down to simplistic terms, when you buy Bitcoin from some centralized exchanges, some are now watching what you do (using Chain Analysis) and then intervening if they don’t agree.

What the authorities are basically saying is that if you are using a mixing service then you are a perceived risk because they cannot see or track what you are doing with your Bitcoin. Are we really comfortable with this?

Another crucial question is…will we see the emergence of two parallel Bitcoin markets? One where the provenance of the coins is clear and proven and a second which operates anonymously in the background. In 2018, across the trading desk at Kenetic we heard rumors of miners looking to sell ‘’virgin’’ BTC at a premium to institutional investors. We were also aware of ‘’virgin’’ transactions being solicited at several mining conferences in 2018/2019.

What is certain is that the attack on individual privacy is real and crypto is a possible solution to counter certain elements of it. How governments and regulators react to increasing privacy of the crypto market, and specifically Bitcoin, could likely determine its long-term success. We will watch carefully as Bitcoin evolves to become more private, followed by the inevitable response from Big Brother.

Crypto weekly performance: 7th February 2020. Source www.bitgur.com

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Auros

Auros

Auros is a proprietary crypto trading firm. We produce newsletters and thought pieces on all topics related to crypto.

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