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Like Bitcoin, Zcash (ZEC) is a cryptocurrency intended to be used as an alternative to fiat currencies for the purchase of goods and services. It is a ‘medium of value exchange’ cryptocurrency. This distinguishes it from cryptocurrencies such as Ethereum’s Ether and Ripple’s XRP. While these cryptocurrencies also see their exchange value vary according to supply and demand, and so can be traded or invested in, they are only ‘spent’ within the context of their particular Blockchain platforms. In the case of Ether, this is to pay for use of the Ethereum smart contracts’ Blockchain platform and as for XRP, it is used within Ripple’s global payments and digital assets Blockchain platform.
Investors and traders are largely attracted to cryptocurrencies for three main reasons. Firstly, the sector, and every individual cryptocurrency including Zcash (ZEC) has much higher average daily volatility than traditional asset classes. Long-term price trends, both up and down, are also far steeper. This increases risk but also represents a very attractive opportunity for profit if price direction is called correctly.
Secondly, as a nascent market considered to hold huge long-term potential if, as many forecast they will, use of cryptocurrencies and blockchain technology moves into the mainstream.
Thirdly, there is very little correlation between cryptocurrency markets and those of other asset classes such as fiat currencies (forex), commodities, equities and government bond markets. These are all tied to local economic trends and geopolitics, whereas cryptocurrencies are not, and are, therefore, not influenced by these factors or at least, to a lesser extent.
Aside from these broader incentives to trade or invest in cryptocurrencies such as Zcash, more specific categories of individuals that would be attracted to ZEC include:
1. Cryptocurrency traders: Zcash (ZEC) is an interesting alternative to Bitcoin for cryptocurrency traders, as a direct, if much smaller, rival. Those trading the market and generally looking for price trends that present trading opportunities, would also take a Zcash (ZEC) position if indicators signal a clear trading opportunity.
2. Currency traders: forex traders hankering after increased volatility during flat periods in the market often turn their attention towards cryptocurrencies such as ZEC. The average daily volatility offers them a riskier but potentially more profitable alternative or complement to their usual forex trades.
3. Long-term Investors: longer term investors who believe in the future of cryptocurrencies, might also be keen on acquiring some Zcash units for long-term exposure. Developments such as regulated cryptocurrency exchanges and the now likely entry of institutional investors into the market, mean many believe cryptocurrencies will enter mainstream financial markets over the coming years. This would massively increase trading volumes which, after an initial boost, would be expected to reduce volatility, improving the case for the adoption of fiat alternatives such as Zcash to be used on a day-to-day basis as a general medium of exchange. This scenario would increase demand, and the ZEC exchange rate, by many multiples from where they are today.
4. Cryptocurrency Experts: individuals with a deeper technical understanding of cryptocurrencies might wish to invest in Zcash if they believe in the quality of the Bitcoin rival’s underlying blockchain protocol and think that this means the ZEC cryptocurrency has a bright future.
Bitcoin: the original cryptocurrency is still a major, if receding, influence on the wider cryptocurrency market. Despite Zcash theoretically being a direct rival to Bitcoin, it is still generally pulled down or up with the rest of the major cryptocurrencies in correlation with major Bitcoin price moves.
Zcash Traction and Traction Sentiment: the more people spend Zcash, the more demand there will be for ZEC, which will drive up its price. Inversely, if it loses popularity, demand will drop and its value with it. In the short term, sentiment around long-term traction impacts price but longer term, it will be the use of ZEC to pay for goods and services that will be core. The high levels of anonymity that ZEC offers probably means that it may not be suitable for mainstream vendors of goods and services who are obliged to implement KYC (know your customer) procedures, but there are plenty of niche markets that respect client anonymity. As such, major companies accepting payments in Zcash will act as a catalyst to value gains.
Major Cryptocurrency Exchange Listings: the more major cryptocurrency exchanges support Zcash, the better for ZEC’s value. Easy access for traders and investors to buy a cryptocurrency, as well as increasing its profile, help drive demand.
The Blockchain of many cryptocurrencies uses private keys that identify a particular wallet. When this ‘address’ is attached to multiple transactions over time, third parties such as marketers or government authorities can theoretically learn about that user’s purchasing trends and potentially trace the wallet back to the owner. The Zcash Blockchain only shows a transaction has taken place but not the wallet addresses of the parties involved or even what the amount was. This is achieved through the use of zero-knowledge proof constructions called zk-SNARKs.
However, critics have argued that the zero-knowledge zk-SNARKs mean if an attacker did succeed in breaking the cryptography of the Blockchain, there would be no way to subsequently distinguish between ‘fake’ and ‘legitimate’ Zcash coins. Also, the SNARK parameters central to the Blockchain were arrived at, as with most cryptocurrencies, by the creation of public/private key pairs. However, in the case of Zcash, the difference is that the private components were subsequently destroyed.
Zcash was launched in late 2016 and is a further development of the earlier ‘Zerocoin’ project initiated by the same core team in 2013-2014. It was intended to address security issues in Bitcoin – particularly those related to anonymity. Zooko Wilcox is the Zcash CEO, having previously filled the same role in the ZeroCoin Electric Coin Company.
The Zerocoin protocol allowed Bitcoins to be converted to Zerocoins, which could then be split and merged and converted back to Bitcoins, providing greater anonymity by concealing the origin of payment. Further improvements to the Zerocoin protocol in collaboration with cryptographers from MIT, Tel Aviv University and the Technion - Israel Institute of Technology led to Zerocash and subsequently Zcash in its current format.
The unflinching focus on anonymity around ZEC holders and Zcash transactions is both a blessing and a curse for the cryptocurrency. It means it is unlikely that Zcash can ever truly become a day-to-day alternative or replacement of fiat currencies. However, from an investment point of view, it also provides Zcash with a unique advantage that will make it popular with certain environments. That will be enough to drive Zcash’s value far beyond where it is today and provide huge returns for ZEC investors.