Anonymous Cryptocurrencies

The rise of bitcoin alternatives that offer true anonymity

© Will Martin

Updated July 2014

First Published June 13, 2014

Originally Titled “Black Market Cryptocurrencies”

All rights reserved.

Kindle ASIN: B00KZ6WANE

Paperback ISBN-13: 978-1500682583

Contents

1.The Global Black Market

2.Darknet Marketplaces

3.Non-Nefarious Demand

4.Inflation and Adoption

5.Bitcoin (BTC)

6.Darkcoin (DRK)

7.X11coin (XC)

8.Fedoracoin (TIPS)

9.Dark Wallet

10.Zerocoin/Zerocash

11.Anoncoin (ANC)

12.Neutrino (NTR)

13.Razorcoin (RZR)

14.Cryptcoin (CRYPT)

15.Safecoin (SAFE)

16.Cloakcoin (CLOAK)

17.Libertycoin (XLB)

18.VeriCoin (VRC)

19.BlackCoin (BC)

20.PinkCoin (PC)

21.NavajoCoin (SUM2)

22.VootCoin (VOOT)

23.CryptoNote

24.Monero (XMR)

25.Bytecoin (BCN)

26.DuckNote (XDN)

27.Fantomcoin (FCN)

28.Quazarcoin (QCN)

29.Boolberry (BBR)

30.MonetaVerde (MCN)

31.Aeon (AEON)

32.Staying Anonymous

33.Who Will Win?

Disclaimer

This book discusses cryptocurrencies, which may be considered to be investment instruments. I am not a registered financial adviser. I am not a professional investor. I am not a professional trader. Investing is risky; investing in cryptocurrencies is likely riskier than most other investments; you could lose all of your principal. You should not make investing decisions based solely on the information contained within this book. The advice and strategies described in this book may not be suitable for you. You should consult a financial professional when appropriate. I am not responsible for your investing decisions and I am not responsible for any loss you may incur as a result of investments made due to the advice in this book. Some anonymizing techniques described in this book my not be legal in all jurisdictions; consult your lawyer before doing anything. While I used my best efforts in preparing this book and trying to cite all of my references, this book and the references used in this book may contain factual errors; never believe anything you read without personally verifying the information. This book is presented “as is” and I make no representations or warranties to the completeness, currentness or accuracy of the information within. If you find errors or omissions, please email me at will@willmartin.com and I will do my best to fix the errors and push the updates through Amazon’s “automatic book update” feature. Full disclosure: I own bitcoins and other cryptocurrencies described in this book. I plan on investing all of the profits from this book into anonymous cryptocurrencies.

Introduction

I’ve been investing in and blogging about cryptocurrencies since May of 2011.[1] I’ve seen the value of bitcoin rise from under $1 to over $1000 in less than three years. The advantages of bitcoin were clear to me in 2011 and remain true today:

•Decentralized: bitcoin is not subject to the whims of a central bank and is nearly impossible for a government to confiscate

•Finite ultimate supply: unlike the exponentially increasing supply of every fiat currency in the world, the supply of bitcoin is limited

•Irreversible: unlike credit cards or PayPal, bitcoin transactions are irreversible, lowering the risk of “chargeback fraud” for merchants

•Low friction: bitcoin payments of any size can be sent to anyone in the world instantly and with very low transaction fees

The biggest advantage missing from bitcoin, however, is anonymity. People often compare bitcoin to “digital cash” but bitcoins are in fact far less anonymous than cash. Once your bitcoin address is linked to your identity, your complete payment history can be viewed. Using bitcoin is like having all of your credit card statements out on the internet but having your credit card number at the top of the statement instead of your name. If someone is able to associate your name with your credit card number they know your full payment history.

Luckily, a number of new anonymous cryptocurrencies have come to the rescue. These currencies offer all of the advantages of bitcoin plus anonymity. In the early stages, I believe that these anonymous cryptocurrencies will see immense demand from the black market. I do not condone such behavior, but I believe that investors could profit from the resulting currency demand. Over the longer run these currencies could also gain wider societal adoption as people demand more online financial privacy. With finite supplies and growing demand, the value of these anonymous cryptocurrencies could skyrocket.

This book looks at these currencies from an investor’s perspective and not from a computer scientist’s perspective. The underlying mechanics of how bitcoin and other cryptocurrencies work is quite complex and in my opinion not completely necessary for investors to fully comprehend. Just as you don’t need to understand how to engineer an iPhone from scratch in order to invest in Apple, so too is it unnecessary to be able to read and comprehend the source code of these currencies in order to understand their investment potential. I also do not cover “mining” or running “master nodes” in this book as I believe it is a subject better suited to computer experts than investors.

I begin the book with a discussion of the forces that will likely drive demand for these anonymous cryptocurrencies over the coming years. I then look at how differences in inflation and adoption will affect the value of these cryptocurrencies. I then introduce each anonymous cryptocurrency contender one-by-one and address their pros and cons. I then offer some step-by-step advice on increasing your anonymity while using these cryptocurrencies. Finally, I finish with some thoughts on what will be required for the winning anonymous cryptocurrency contender to beat the others and take over the market.

1) The Global Black Market

Black Market Size

The main reason for investing in anonymous cryptocurrencies is the immense size of the global black market. For the past 40 years the global black market has increased in size every year.[2] Worldwide, 1.8 billion people earn their living in the black market[3]. The black market accounts for 23% of the global GDP.[4] What most people consider the “black market” (drug dealing, prostitution, etc.) is actually only a very small part of the worldwide black market.[5] Street vendors selling food or goods often don’t report their income. Income for waiters, construction workers, agricultural laborers, and countless other service-sector employees is often off-the-books.

Nearly all of this immense black market activity is currently transacted in fiat cash. In the US, people use US Dollars. In Europe, people use Euros. But cash is messy. You can have it stolen from you. You need a place to stash it, and putting it in a bank exposes you to the police and tax collectors. If you store it at home, you could lose it in a fire or a burglary. When you want to send it to someone far away, you need to go to a money order service like Western Union and pay a large fee. Once you’ve sent it, there’s a record of your transaction that again can leave you exposed to the police and tax collectors. Anonymous cryptocurrencies can solve all of these problems. If they are encrypted and backed up online, they can’t be stolen from you and they can’t be lost in a fire. A million dollars worth of $100 bills weighs 22 lbs. A million dollars worth of cryptocurrency could fit in your pocket on a USB drive weighing a few grams. When you want to send your money to someone, anonymous cryptocurrencies allow you to send money to anyone anywhere in the world for just pennies in fees all while keeping the sender and receiver anonymous and not allowing anyone to know how much money you have. Given the enormous advantages of anonymous cryptocurrencies over cash, I think it is inevitable that a large percent of the global black market will eventually adopt them. Given the finite supply of these cryptocurrencies and the immense size of the global black market, if even a tiny percent of the market adopts these technologies the value of these currencies could rise dramatically.

Black Market Growth

While the global black market is expected to become a smaller percentage of the global GDP over time it will continue to grow in real terms as the global economy grows.[6] Interestingly, academic research seems to indicated that the black market is countercyclical, growing more quickly when economies grow less quickly. Intuitively, this makes sense. When economies enter a recession people lose their jobs and become desperate for work. Many will turn to the underground economy to make ends meet. At the same time, when economies are in recession there is less tax revenue available to pay more police, so the underground economy can grow with impunity from law enforcement. When the underground economy grows, so too does demand for anonymous currency. In a sense, by investing in anonymous cryptocurrencies, you are buying “insurance” against a recession, as the value of the cryptocurrency could increase significantly if the economy falters and the black market grows.

Tax evasion is a major reason why the size of the black market may increase in the future. In order to pay for the unfunded liabilities and deficit spending that governments worldwide are incurring, tax rates will need to increase dramatically in countries like the United States. Many citizens may feel that such tax increases are onerous and unfair, and may choose to work in the black market in order to not pay taxes. Furthermore, many people who are already being supported by government welfare programs may lose their benefits if they find employment. These people too may decide to earn some “money on the side” in the black market and avoid paying taxes on it.

It’s been estimated that to hire a new IT employee who makes $60,000 per year, it costs about $150,000.[7] This is because the cost of job advertising, interviewing, relocation, training etc. can add up very quickly. In the past few years, a number of websites have sprung up that allow IT workers to work online and be paid in cryptocurrencies. Both the IT worker and the company can avoid taxes and save time and money finding each other. In the future, we could see the “black market” for IT workers expand to include many other forms of online labor.

Onerous government regulations may push other people into the underground economy. In the US, the IRS states on their website that bartered goods should be reported as taxable income.[8] This would mean that if I lent a ladder to my neighbor through an online barter exchange and he gave me a 6-pack of beer to thank me, technically we should each be reporting the “fair market value” of the products and services we offered each other on IRS Form 1099-B and we should each be paying taxes on it.[9] Essentially everything we do is taxable, from selling a couch on Craigslist to watering our neighbors plants when they’re away on vacation. In the past decade, the number of audits the IRS does each year have nearly tripled.[10] These onerous government rules are likely to push more people towards anonymous cryptocurrencies. People selling things on Craigslist can request either cash or anonymous cryptocurrency and avoid any paper trail that would leave them liable to pay taxes. With the government needing more income tax revenue and with technology making it easier for people to make and spend taxable income in untaxable ways, I predict that we will see a dramatic acceleration of the cat-and-mouse game of “black market” tax evasion in the future. The future looks bright for black market currencies.

Economic Collapse

The black market thrives during times of chaos. As mentioned before, the black market grows at a faster-than-normal rate during economic recessions. In the more extreme cases of economic collapse, the black market can completely take over for the collapsed conventional market. When governments and economies collapse, their fiat currencies usually collapse with them. We’ve seen this many times with currencies like the Soviet Ruble and Zimbabwean Dollar collapsing along with their host country’s economies. When currency collapse happens, the black market steps in to fill the void and the value of alternative currencies explodes. In post-Soviet Russia, US Dollars became the king currency of the black market. In post-hyperinflation Zimbabwae US Dollars and gold became the currencies of choice.[11] In the future, due to their advantages of security and anonymity, anonymous cryptocurrencies could fill the void in countries experiencing economic collapse. In such a future, the value of these cryptocurrencies could significantly rise.

There are numerous ways that the American or global economy could collapse. We came very close to a collapse in 2008. The economy was only saved by the Federal Reserve encouraging the printing of trillions of dollars of new fiat currency through its quantitative easing (QE) and zero-interest-rate policies (ZIRP). The US dollar holds its place of exorbitant privilege due to its position as the world’s reserve currency. But countries like China and Russia are working hard to unseat the dollar. If the US dollar loses its reserve status, the Federal Reserve could lose its ability to find borrowers of new debt, thus bringing the house of cards down.

Collapse could happen for a number of other non-financial reasons. Runaway climate change is one potential candidate for global economic collapse. Positive feedback loops like arctic methane release, where a warming arctic releases trapped methane which leads to more warming, or the ice-albedo feedback loop, where arctic ice melts and exposes darker water and ground which speeds up ice melt, could potentially lead to runaway climate change. Because these feedback loops are non-linear, the effects on our climate are non-linear. It is feasible that these feedback loops could run out of control and our world could warm by many degrees. In such a world, sea levels would rise, storm intensity and frequency would increase, deserts would expand and crops would fail. Countries like Pakistan and Bangladesh are most at risk to climate change and could see their governments and economies collapse.[12]

Peak oil is another candidate for global economic collapse. Oil is a finite resource and as such its extraction rate will eventually peak and decline - that is a geological fact. The consequences of peak oil could be dire because we are currently “addicted to oil.” Everything you see in the room around you (including yourself) is either directly made of oil, required oil in its manufacture and/or was transported to your room using oil. Every calorie of food you eat required 10 calories of hydrocarbons in the form of pesticides, fertilizers and diesel fuel to plow, plant, harvest, package, transport and cook it.[13] When the global rate of oil production peaks and begins to decline, the economic and societal consequences could be tremendous if we haven’t developed oil-independent energy generation, food production and transportation infrastructures. No one knows when peak oil will happen or how dramatic the decline rate will be after the peak, but if it happens soon, we could see economies collapse. For those interested in the topic, I blog about peak oil at peakoilproof.com

A peak-oil related advantage of cryptocurrencies is the fact that they are essentially “stores of energy.” Cryptocurrencies are usually generated through “mining” and mining requires electricity to power CPUs, GPUs and ASICs chips. The algorithms of these currencies adjusts the mining difficulty until it reaches an equilibrium. Using standard economic theory, over the long run this equilibrium should occur when the marginal cost of mining a coin reaches the marginal revenue of selling that coin. Since electricity is one of the main expenses associated with mining, over the long run the price of these currencies should fluctuate as the supply of mining rises and falls with changes in the price of energy. If peak oil (and peak gas and peak coal) will make the price of electricity rise over time, coins mined today with “cheap” energy should be a fantastic investment for a future with expensive energy. Developers are currently working on “proof-of-stake” cryptocurrencies that can greatly lower the electricity required across the transaction network; in a future world of expensive energy we could see one of these “proof-of-stake” cryptocurrencies overtake bitcoin.

Nuclear war could still break out at any moment. Pakistan and India hate each other and both possess enough nuclear weapons to plunge the world into nuclear winter should they ever decide to use them.[14] This scenario is terrifyingly likely due to the insecurity of Pakistan’s nuclear weapons. According to the Nuclear Threat Initiative, “Militants have already targeted at least six facilities widely believed to be associated with Pakistan’s nuclear program. To hide weapons from the prying satellite eyes of the United States, Pakistan moves warheads around in unmarked vans with low security profiles down busy roads. In fact, Pakistanis see jihadists as less threatening than Washington, which they believe wants to seize their nuclear weapons.”[15] A single Pakistani nuclear weapon seized by an extremist and smuggled in to India and exploded could lead to all-out regional nuclear war ending in global nuclear winter. Outside of government nuclear weapons, there are black market ex-Soviet nuclear weapons available to the highest bidder. Journalists have succeeded in tracking down sellers of these weapons and confirming their authenticity.[16] For years, Al Qaeda sent feelers out looking to buy such nuclear weapons.[17] Just as with India and Pakistan, a nuclear bomb detonated by a terrorist group could lead to retaliation and counter-retaliation by nuclear superpowers, leading to nuclear winter. Nuclear war would cause the collapse of our global economy. The internet was originally designed (as ARPANET) to survive global nuclear war. So even in such a horrible post-apocalyptic future, it is feasible that cryptocurrencies would survive and potentially thrive as the fiat currencies from any collapsed government would become worthless. In a way, buying crytocurrencies is like buying some insurance against global nuclear war.

A Cryptocurrency-Based Economy?

It is feasible that in the future a post-collapse society may try to rebuild itself using a fixed-quantity cryptocurrency instead of a variable-quantity fiat currency. In a country that collapsed due to hyperinflation caused by money printing, the citizens may demand that the replacement economic system forbid any money printing by design. In the past, such a system was accomplished using commodity-based currencies such as a gold standard or a silver standard. These systems, however were still not immune to government debasement. Throughout history, governments that have used commodity-based currencies have debased their value by gradually lowering the quantity or quality of the underlying asset. In Roman times, the government debased the silver Denarius coins by reducing their size and lowering the fineness of the silver in them.[18] Beginning in the 1100's, the British Pound was backed by a pound of sterling silver. In 1971, the pound was de-linked from silver and free-floated against other currencies. The British pound that would buy you a full pound of sterling silver in the 1100's will buy you only 0.003 pounds of sterling silver today. Rather than debasing the currency by physically altering the metal, the government debased the currency by simply changing the law. Because cryptocurrencies float freely against all of the world's currencies and because no government law can alter their supply, it is impossible for a government to debase the currency.

Cryptocurrencies could theoretically eliminate a government's ability to hamper free enterprise by confiscating hard money through enacting price controls and rationing measures. In 1933, Franklin Delano Roosevelt ordered the confiscation of all privately-held gold through Executive Order 6102.[19] Since cryptocurrencies are virtual and decentralized, it is impossible for any government authority to confiscate them or freeze people's assets. In the Soviet Union, for example, the government enacted price controls and rationing schemes during periods of goods shortages.[20] These efforts merely distorted the markets and encouraged underground economies to spring up. The ultimate solution to shortages is the free market, because by determining resource allocations based on the proper price of goods, the market sends price signals, thereby encouraging investment in production of whatever is in short supply, helping to bring the market back to equilibrium. With government interference, these price signals are warped and resources may be easily misallocated.[21] If the economy used a cryptocurrency instead of a fiat currency, there would be no way for the government to restrict the underground economy, making price controls and rationing difficult or impossible to enforce.

If a government used a cryptocurrency rather than its own fiat currency it would have to operate the way governments did under the gold standard.

Instead of printing money to pay for budget deficits, it would have to balance its budget or issue bonds. If the government issued bonds, they would need to have an interest rate that compensated people for the risk of default. Under the previous gold standard, the US government defaulted on gold-backed liberty bonds in the 1930's, leading to difficulties in selling further bonds.[22] The “inflation tax” that we all pay, but rarely notice, would be replaced by traditional taxes.[23] Without the inflation tax, there would be far more transparency in the way that we fund our government, and people would be less likely to allow the government to fund “pork barrel” projects or subsidies that benefit only a select few at the expense of the many.[24] People would be less likely to allow the government to fund wars without a clear idea of how the vast expense of wealth and human life would benefit the citizens back home.

The use of cryptocurrencies by a government could also eliminate the “iron triangle” problem, as banks wouldn't be able to lobby a central bank to enact a loose monetary policy that would increase their profits and allow them to fund even more lobbying for even looser monetary policy.[25] This system would also eliminate the problem of political influence over central bank money printing. For example, the incumbent political party wouldn't be able to create the appearance of a robust economy right before an election by pushing the central bank to enact loose monetary policy. Politicians would have to get elected based on how their policies created actual economic prosperity, rather than perceived prosperity.

By eliminating the central bank, a cryptocurrency-based economy also eliminates the “too big to fail” moral hazard problem with banking, whereby if banks do well, bankers are paid large bonuses, and if they fail, they get bailed out by the government and bankers are still paid large bonuses. Such moral hazard, where there are no consequences for failure, cause bankers to take imprudent risks. With cryptocurrencies there is no central bank to print money and bail out failed banks. Bankers would have to take more measured financial risks by using less leverage, which would make booms and busts smaller and less painful. Without a central bank to control the money supply, inflation and deflation would be determined by the free market.

In such a system, cryptocurrency-based banks could emerge, offering loans for homes and businesses. Because the quantity of the cryptocurrency would be finite, any banks that would use them would be less likely to practice risky forms of fractional reserve banking.[26] Unlike our banks today, if a “cryptocurrency bank” used the money multiplier effect to leverage up a $1,000 deposit into $10,000 in loans, it would then be at risk of a bank run. Since there's no central bank to eliminate systemic risk through a mechanism like our FDIC, banks would need to use money multipliers that are lower than are currently used in order to limit their risk of a bank run. A cryptocurrency bank could theoretically use a higher money multiplier and pay an insurance company to insure them against a bank run, but the result may be similar to what we saw when AIG, which insured against defaults of collateralized debt obligations by issuing credit default swaps, went bankrupt, causing a wave of bankruptcies that ended in the Great Recession. In practice, if someone started a “cryptocurrency bank” it would most likely be a “full reserve bank” that would only allow people to store their money at the bank for a “safekeeping fee” or would invest it by allowing the bank to loan it out in return for interest. For deposit accounts, banks would need to compete against each other on the basis of which was the most solvent, rather than which can provide the most gimmicks like “free checking.”

While the possibility of a cryptocurrency-based economy is merely a thought experiment, it does show the vast future potential for these currencies. If these currencies live up to even a tiny sliver of their capability, demand will skyrocket and their valuations will soar.

2) Darknet Marketplaces

The Silk Road

The grandaddy of all darknet marketplaces is the Silk Road. The Silk Road has been called by the press the "Amazon.com of illegal drugs.”[27] The site could only be accessed through the Tor network - a system that exists on top of the existing internet and provides anonymous browsing by bouncing traffic through layers of servers. Users of the Silk Road could find not just illegal drugs but also counterfeit currency, stolen passports, stolen credit cards and almost any other illegal good one can imagine. Users simply picked what they wanted from the products offered by hundreds of vendors, sent the vendors bitcoins, and a few days later the products would arrive by conventional mail. Launched in February of 2011 the site grew to immense popularity in a very short period of time. By 2013 it was estimated that nearly half of all bitcoin transactions were used to purchase products on the Silk Road.[28]

The immense amount of illegal business being done out in the open garnered a lot of attention both from the news media and from the FBI. Following an intense investigation, the FBI moved in and on October 2nd, 2013 the alleged founder of the Silk Road, Ross Ulbricht, was arrested at a public library in San Francisco. At the time of his arrest, the Silk Road had over a million registered users and had transacted over $1.2 billion in sales.[29] According to Wired magazine, Ulbricht made a number of critical errors that led to his capture, including "using the name 'altoid' to post messages advertising Silk Road to a forum and then using that same name to post to a Bitcoin forum seeking workers for a Bitcoin startup. In the latter message, ‘altoid' told would-be job applicants to contact him at rossulbricht@gmail.com."[30] It is unlikely that the entrepreneurs behind the successors to Silk Road will make such mistakes again.

The lesson one should take away from the Silk Road is that within the enormous global black market there is an insatiable appetite for technological progress. Successors to the Silk Road will build upon the site's best practices and will use improved anonymity techniques, making it far more difficult for law enforcement to shut them down. The darknet marketplace will continue to grow and with it will grow the demand for anonymous cryptocurrencies.

Silk Road Successors

Just a month after the original Silk Road was shut down, the site came back online under new management as the Silk Road 2.0. As of this writing, the site continues to operate.

Other competitors haven't faired as well as the Silk Road 2.0. The competitors Atlantis and Project Black Flag both shut down out of fear of arrest, stealing their users bitcoins in the process.[31] A competitor called Utopia lasted just 9 days before being seized by the Dutch police.[32]

The original Silk Road was shut down by the FBI when they gained access to the centralized server. Many developers are currently working on projects to produce decentralized marketplaces that wouldn’t be dependent on centralized servers and thus would be immune to such seizure. OpenBazaar, formerly DarkMarket, is one such project which would “create a decentralized trading platform run by each of its participants, instead of one run by a central authority, which can control trades (and be held accountable for them).”[33] Other decentralized marketplace projects that are not yet publicly available are Counterparty and Ethereum.

BlackCoin’s BlackHalo system, CloakCoin’s OneMarket system and Mastercoin's Decentralized Exchange system all allow users to conduct trade between their coins and bitcoins. These systems could be expanded in the future to allow for decentralized trade of any product.

On July 16th, 2014 this book became the world’s first documented product to be sold on a decentralized marketplace.[34] The sale occurred using BitXBay, the world’s first publicly-available decentralized marketplace software that doesn’t rely on a centralized administrator. Because of its decentralized, admin-less structure, BitXBay is practically impossible to censor or shut down. BitXBay uses a multi-signature decentralized escrow system that allows parties to trade goods and services without the need for a centralized escrow service. The buyer of my book, who became the first documented person to ever purchase a product on a decentralized online marketplace, wanted to be identified only as “Michael.”

Given the vast demand for these services, it is almost a certainty that someone will come along and create a darknet marketplace that is immune from government seizure. When this happens, the only course of action police will have will be attempting to track down each drug seller and drug user individually. At this point, only the most reckless buyers and sellers will be caught. Such high “frictional costs” to police action will ensure that the darknet marketplace will continue to grow, pushing up the valuation of anonymous cryptocurrencies with it.

Darknet Marketplace Growth

Convenience is a major competitive advantage for darknet marketplaces. People living in large cities have access to a broad array of black and gray market goods, but only half of the worlds population lives in cities.[35] The economies of scale simply aren't attractive for black-market sellers to target rural buyers. For the half of the world living outside of cities, darknet marketplaces can allow them to gain access to products that were previously unavailable to them. Just as Amazon has opened nearly unlimited product selection to rural buyers, so too will darknet marketplaces open black market selection to these people. This huge untapped market is sure to continue to push up demand for darknet marketplaces in the future.

Safety is another major advantage of darknet marketplaces. Would you allow a stranger who you knew was a criminal into your home? Every day millions of drug users allow drug dealers into their homes. Drug dealers, by virtue of the violence inherent to the drug trade, are often very dangerous people. If a drug dealer is committing a crime by selling a person drugs, what is stopping them from committing other crimes? Rape, violence and theft against buyers can be done with impunity. Who is the drug user to turn to? The police? Darknet markets, on the other hand, leave the drug dealer out of the drug buyers home. The person selling them drugs may live thousands of miles away, making the drug user much less likely to be the victim of violence or theft.

Ebay-style seller ratings on darknet marketplaces can protect consumers from adulterated and unsafe products. According to The Economist, “In Europe much cocaine is now laced with levamisole, a cattle-deworming drug. Heroin, too, is pricier and of worse quality; some batches in Europe appear to have been infected with anthrax.”[36] Darknet marketplaces can protect users against such dirty dealing by allowing the marketplace to “vote down” untrusted sellers. This aspect of darknet markets has the potential to save countless lives.

Another advantage of darknet marketplaces is their immense selection. Back in the 1990's a drug user would only have access to the few drugs that their drug dealer held in inventory at any one period of time. Today, drug users can go on darknet marketplaces and have access to literally thousands of different types and grades of drugs. Just as Wal-Mart buried their mom-and-pop competition with immense selection, so too could darknet marketplaces replace existing small-time drug dealers.

For all of these reasons, I believe that the future is bright for darknet marketplaces. As these marketplaces grow, so too will demand for anonymous cryptocurrencies. With fixed supplies and demand rising for these currencies, their value is likely to rise significantly.

Gambling

After the darknet marketplaces like the Silk Road, the next largest current use for cryptocurrencies is in online gambling. As of 2014, bitcoin-based online gambling is a multi-billion dollar industry.[37] Any type of gambling you can imagine, from sports betting to poker, can be found in the online bitcoin casinos. In 2012 the legal global gaming market net of prizes was $430 billion.[38] In 2013 just in America alone, gamblers lost $119 billion.[39] Including the $140 billion in illegal gambling worldwide each year, the global gambling market tops out at over a half a trillion dollars per year.[40] Currently only $35 billion of this half trillion dollar market is conducted online.[41] This leaves tremendous room for growth in online gambling.

Unlike drug marketplaces, online gambling websites can be located in jurisdictions where gambling is legal and can be relatively confident that they will be immune from prosecution from other governments. While most online cryptocurrency gambling is currently conducted in bitcoins, given the advantages of anonymous cryptocurrencies to gamers to protect themselves from arrest by their own government, it is likely that much of the online gambling trade will shift away from bitcoins and towards anonymous cryptocurrencies. This would seem to be very bullish for the long-term valuation of these currencies.

Offshore Banking

Due to strict banking secrecy laws in many offshore banking centers, it was relatively easy for anyone to set up an anonymous offshore corporation back in the 1980's and 1990's. These offshore corporations could hold a bank account and invest in companies or property. For someone hoping to keep their wealth untaxed, it was possible to move their money relatively anonymously to one of these offshore corporations and grow their nest egg without having to pay any capital gains tax. Since 9/11, however, the United States government has been pressuring offshore banking centers to destroy their banking secrecy laws under the guise of "stopping terrorism." Today, nearly every banking center, from Switzerland to Belize, requires people to present identification when setting up an offshore corporation.[42] Despite this compliance, US efforts to stop their citizens from using offshore banking centers continue to get worse. Under the Foreign Account Tax Compliance Act (Fatca), by 2017 "foreign financial firms will have to proactively identify every American account holder with assets of more than $50,000 and report details about their financial activity or face a significant penalty."[43] Simply put, using the existing global financial system, it is extremely difficult for the average person today to avoid taxes and not get caught.

Because of the increasing pressure of the United States to destroy banking secrecy laws, much of the demand for banking secrecy could get pushed underground from the existing global financial system to the shadow economy through anonymous cryptocurrencies.

3) Non-Nefarious Demand

Why would you need a completely anonymous internet currency if you don't have anything to hide? Don't these anonymous currencies only exist to enable criminals? A simple response is “why does cash exist?” Cashless society advocates could reasonably answer that cash doesn't need to exist in this day and age and is merely a relic of a pre-internet marketplace. Perhaps a more appropriate response would be “If you have nothing to hide, then why don't you give me your most recent tax return along with your computer password and ATM PIN number?” No one would be reckless enough to give out these financial details in the real world, but people seem to be oblivious to the fact that they give out such details every day online.

Identity theft is an incredibly common crime that seems to be getting more prevalent each year. The Target stores data breach of 2013 resulted in the personal information (including credit card and debit card numbers) of 40 million people to fall into criminal hands. According to the Bureau of Justice Statistics, 7% of all Americans were victims of identity theft in 2012.[44] If 7% of Americans were victims of muggings we’d call it an epidemic and have police on every street corner, but due to its complicated nature, identity theft doesn’t garner the same attention as other crimes. Of course something can be done and cryptocurrencies are the answer. If people began using anonymous cyrptocurrencies in day-to-day transactions, data breaches and identity theft would become fruitless for criminals. Stealing a person’s personal information such as their social security number or home address would not give a criminal access to a person’s finances, which would be held safely in an encrypted wallet with a password only they know. Cryptocurrencies hold a huge promise to protect people from the tremendous risk of identity theft and could become very popular as a result.

Oppressed people often need to conduct transactions out of sight of their oppressors. For example, a protest group may have a big protest coming up and they need to buy megaphones and materials to build signs. If no one knows ahead of time of their protest, it makes it much harder for government officials to block the protest or for opposing groups to mount a counter-protest. All of this activity is perfectly legal under the 1st amendment to the United States constitution, but the demand for anonymity remains. Whistleblowers and leakers can also benefit. Servers cost money and hosting a website like Wikileaks, with its enormous troves of files being downloaded millions of times, can be extremely expensive. When people are able to donate money anonymously to such websites, transparency and accountability thrives. Money talks and anonymous cryptocurrencies may become the single most important enabler of the freedom of speech since the birth of the internet.

Surprise gifts are another area where people may want to use anonymous cryptocurrencies. Buying an engagement ring is perhaps the best example; if a couple has been living together and sharing expenses and financial accounts it may be extremely hard to hide such a large purchase. Similarly, long-time spouses may require increased financial anonymity when planning a surprise party for their significant other. Unfortunately, the same anonymity that these cryptocurrencies create for surprise gifts can be used to hide assets from partners in divorce and child support proceedings.[45] As always, cryptocurrencies are merely a tool that can be used for both good and bad.

Some people can become targets for extortion simply because they are wealthy. A prominent doctor, for example, may become the target of frivolous malpractice lawsuits. The doctor might pay outrageously high malpractice insurance premiums or simply settle out of court to avoid the legal fees required to prove his innocence. If, however, that doctor kept most of his wealth in “undiscoverable” cryptocurrency accounts, anyone who sued him and gained access to his bank records would think that he was practically bankrupt and would conclude that suing him wouldn't be worth the hassle.

The US government can freeze bank accounts of people suspected of wrongdoing before they have gone through a full trial. This can include freezing bank accounts of non-citizens as well as freezing international bank accounts, even when the government may not have proper jurisdiction. In the US you are “innocent until proven guilty” but the government can still lock up your assets before it has proven you guilty. Internet entrepreneur Kim Dotcom, founder of the cloud file sharing site Mega, found this out the hard way in 2012 when his bank accounts containing $175 million were frozen. If Kim had kept a few million dollars stashed away in some anonymous cryptocurrency accounts, he'd be in a far better position to pay his lawyers today.

People engage in a multitude of embarrassing but legal behaviors. A priest or government official certainly wouldn't want a member of his perish or constituency to see him exiting an adult book store. These days almost all pornography is transacted online, but with data breaches becoming more common, how does that person protect themselves from their credit card statement becoming public information? Anonymous cryptocurrencies can protect people from the disclosure of embarrassing and potentially career-damaging information being leaked.

In war-torn regions, refugees usually escape with just what they can carry. On their way out, boarder guards can strip them of even these meager possessions. A refugee with a wad of cash can lose it in a second, but a refugee with a cryptocurrency wallet hidden on a small flash card can hide it practically anywhere.

Remittances are a half-trillion dollar industry, growing at more than double the rate of global GDP growth.[46] When a Mexican immigrant in the US or a Pakistani immigrant in Saudi Arabia wants to send money back to their families at home, they currently have to use a service like Western Union. A World Bank study found that the average fee for remittances around the world was 9.8%.[47] Depending on the efficiency of the algorithm, cryptocurrencies can lower remittance costs below 1%. On March 12th, 2014 the daily transaction volume of bitcoin surpassed the daily transaction volume of Western Union.[48] While only a small percent of these bitcoin transactions were used for remittances, it shows that cryptocurrencies are ready to challenge the big boys.

The “unbanked” are another group that is currently being crushed under the weight of a system that was never designed to help poor people. Many poor people hold bank accounts only to be hit by massive fees and penalties when they accidentally overdraft their accounts. Many who have been burned by this system turn away and become the “unbanked.” It is estimated that there are 10 million unbanked Americans today.[49] More than a million Americans have been “blacklisted” by credit agencies and couldn’t open a checking account if they wanted to.[50] In order to cash their paychecks, these people must turn to check cashing stores who charge them an average of 2.4%.[51] In 2011 Bank of America attempted to implement a $5 fee for debit card holders before having to back down amidst howls of protest.[52] Such actions make it increasingly difficult for the unbanked to open traditional bank accounts. The best options these people currently have are cash and prepaid debit cards, both with their downsides. With their lower fees, anonymous cryptocurrencies could come to the rescue of the neglected underclass of the unbanked.

Businesses can also greatly benefit from anonymous cryptocurrencies. Because the bitcoin ledger is completely public, any company currently accepting bitcoins is opening their books for the competition to see. Often small companies are most vulnerable to competition when their business is exploding. If anyone can see how much money a company is making, they can also see when demand picks up. If alpaca socks all of a sudden become the new fashion rage, bitcoin transactions going to the address associated with the alpaca sock retailer grasshillalpacas.com would see increased transaction volumes. Competitors watching this address would see the increased sales volume and could flood the market with their own brands of alpaca socks, taking away much of the potential profit from Grass Hill Alpacas. If, however, Grass Hill used anonymous cryptocurrencies, there would be no way for the competition to snoop in on their transaction volume and they could potentially grow to be much larger (and gain much more profit along the way) before competitors took notice.

For all of the above reasons, anonymous cryptocurrencies should be embraced. A hammer can be used to build a house or to bash someone's head in. It is a tool, nothing more. Likewise, anonymous cryptocurrencies are tools that can be used to obfuscate illicit activity or to protect innocent people from oppression. While the black market is large, it is just a small percentage of the legitimate global economy. If people wake up and begin to demand freedom and privacy, the value of anonymous cryptocurrencies could skyrocket.

4) Inflation and Adoption

People get very excited about the potential of alternative cryptocurrencies (altcoins) because many believe that they can mimic the success of Bitcoins. Back in 2011, an investor could purchase Bitcoins for less than $1 each. By 2013 the price broke $1000 per bitcoin. An investor who bought at a dollar in April of 2011 and sold at a thousand dollars in November of 2013 made a 100,000% return, or compounded annual return of 1,325%.[53] Considering the historic CAGR of investing in the S&P500 is about 9%, that’s pretty good![54] An investor who spent just $1000 in 2011 to buy 1000 bitcoins (and was lucky/smart enough to hold on to them) would have been a millionaire less than three years later. Bitcoin's price rise rivals even the most famous penny stock stories. For example, Monster Beverage Corporation (MNST) went from $2 a share in 2003 to $101.90 in 2006 - a 5,095% return.[55] Pier 1 Imports (PIR) went from $0.11 in 2009 to $25.20 in 2013 - a 22,910% return.[56] While a 229X return may be nice, Bitcoin’s 1000X return is nicer.

The ideal anonymous cryptocurrency for investors is one that has low supply inflation and high adoption. Combined, these two factors will create an environment of low supply and high demand that pushes the price of the currency up. Bitcoin had both of these factors. Bitcoin’s annualized supply inflation began at over 100% but quickly fell. By 2011, supply inflation was below 50% per year. By November 2013, when the price hit $1000, annualized supply inflation was just 11%. With demand clearly growing more than supply, it was almost inevitable that the price would rise astronomically. When investors look to altcoins for the same meteoric rise, it is important that they choose a coin that has low supply inflation and high adoption.

Supply Inflation

Supply inflation of any cryptocurrency is governed by the “block reward” formula built in to the software. Most altcoins follow the bitcoin model of having a finite ultimate supply of coins. The block reward function can dole out coins in any number of ways between the “genesis block” (the first block in the blockchain) and the supply cap. Most altcoins also follow the bitcoin model of given more coins out in the beginning and gradually reducing the supply over time until it approaches the supply limit asymptotically. Altcoin developers need to walk a very fine line between rewarding miners and rewarding investors. If the block reward function gives away a large number of coins in the first few months, miners are encouraged to jump on board early. Because miners do the work that is required for the network to function properly, it is extremely important to get the support of miners early. Miners are also a very chatty bunch. On the forums, blogs, IRCs and Reddit, they will “go to bat” for whatever altcoin they are mining. If you reward the miners with a large number of coins early on, they will be more incentivized to evangelize the coin and promote adoption. On the other hand, if the block reward function gives away a large number of coins in the first few months, investors can get hurt by the high supply inflation. For example, if supply inflation is 400% per year and an investor expects the currency’s adoption rate to grow by 100% per year (doubling each year), they won’t buy the coin. If all investors think the same way, the price will drop over time. A gradual price drop over time could spook any existing holders (usually the early miners) causing them to liquidate their holdings, pushing the price down more and causing a “death spiral” that can kill the currency.

“Premine,” “instamine” and “fastmine” are words that investors should look out for. “Premining” is where the currency creator mines a certain amount of coins for themselves before they release the currency for other miners. An “instamine” or a “fastmine” occurs when the currency is released publicly but a large percentage of the coins are mined by just a few miners in the first few days of the coin. An instamine can act the same way as a premine, where the developers get the majority of the initial coins, if the developers operate a large percentage of the mining horsepower during the instamine. None of these mining behaviors are good or bad by themselves, but they can encourage bad behavior from an investor’s standpoint. A premined currency can encourage the creator to dump their coins once the price rises a significant amount. Instamined and fastmined coins can encourage the few initial miners with a large amount of coins to dump their coins when the price rises. Both of these can cause the price of the currency to plummet in the future, hurting investors who got in right after the instamine. The argument for premines and instamines is that they rightfully reward the people who were instrumental in the early success of the currency. An altcoin is only as good as the community supporting it and without such a reward for developers and early miners these currencies may never have been developed and their mining networks may never have been built up in the first place. Premines and instamines can also give the developers troves of coins which they can pay out to people in order to encourage further development of their currency. Just as startup tech companies often issue stock in lieu of payment for services when they are cash-poor in the early stages, so too can altcoin developers dole out premined coins to coders who help them develop their software in the early stages. The founders of Google and Facebook got fabulously wealthy from their disproportionate stock ownership, but investors were still willing to pump their money into the company because they realized it could make them wealthier as well. In the same way, premines and instamines can make the developers and early miners wealthy but if the currency becomes widely adopted, investors can become wealthy too. If everything goes well, premines and instamines can be win-win for everybody. So while premines and instamines can be both good and bad, investors should be aware of them and their potential to create a future currency devaluation. When analyzing a currency that has undergone a premine or instamine, investors should ask themselves “who are the developers? are they reputable people? are they in it for the long-haul or a quick buck? is the community supporting adoption of the currency in online marketplaces?” If you can’t answer these questions, it may be best to steer clear.

Charting out the supply inflation rates of various cryptocurrencies (and the US Dollar and gold), we see that inflation rates can be vastly different. Some currencies have incredibly high inflation rates.

The currencies in the chart above, in order from lowest to highest annualized supply inflation rate today, are:

1.Gold - 2%

2.US Dollar - 7%

3.Bitcoin - 11%

4.Bytecoin - 16%

5.Darkcoin Minimum - 43%

6.Darcoin Maximum - 122%

7.Monero - 521%

8.Fantomcoin - 716%

9.Quazarcoin - 745%

10.Ducknote - 1330%

11.Aeon - 1825%

Currency Adoption

While investors should look for currencies with low supply inflation rates, they should also look for currencies where adoption rates are high. In the long term, an anonymous cryptocurrency can only survive if it becomes a widely adopted medium of exchange. Two areas of adoption that investors should keep an eye on are darknet marketplaces and online gambling. Together, these two markets represent billions of dollars in demand for a currency. Once a prominent website begins accepting an anonymous cryptocurrency, the demand for that currency will grow significantly as marketplace buyers purchase the currency so that they can exchange it with marketplace sellers for goods and services. While marketplace sellers can turn around and convert the cryptocurrency back to fiat currency (thereby pushing down the price), a large amount of currency will remain in people’s wallets as a store of value. Just as the average person keeps a balance in their checking account, so too will people keep a cryptocurrency balance in their wallets. As more and more people use a certain cryptocurrency on these exchanges, more and more people will hold a balance on their wallets. As long as the rate of demand for the coin outstrips the rate of new coin supply, the price will rise. As of this writing, the Silk Road 2.0 appears to be the largest darknet marketplace; investors should keep an eye on which currency they adopt. Based on volume data, SatoshiDICE appears to be the world’s largest bitcoin gambling site; if SatoshiDICE begins accepting an anonymous cryptocurrency, the value of that currency could rise significantly.[57]

5) Bitcoin (BTC)

Bitcoin (BTC)

Official Website

bitcoin.org

Decentralized Ledger

Yes

Irriversable Transactions

Yes

Anonymous Transactions

No

Independent Currency

Yes

Working Public Version

Yes

Proof of Stake

No

Transaction Speed

10 minutes

Current Inflation Rate

~14%

Geneis Block Date

Jan 03, 2009

Gallons of ink have been spent in other books explaining the history and details of bitcoin. I will only discuss bitcoin insofar as to explain the anonymity shortcomings of the technology.

First, the bitcoin transaction ledger is openly available for everyone to see. Anyone can see every transaction ever made including the sender, the recipient and the amount sent. When you make a transaction with bitcoin, it remains in the ledger forever. If at any point in the future the transaction address is linked to you, your anonymity is broken.

Second, bitcoin uses “pseudonymous” addresses. While these addresses don’t have your name attached to them, it is a trivial matter to link them to you. Any time you send a transaction to a known third party, such as a bank or exchange, you make all of your previous transactions linkable to you. When a person puts a bitcoin “tips” address on their blog and then uses those coins to purchase drugs from a website like the Silk Road, it is easy for anyone to link that person to their illegal action. With pseudonymous addresses, even the tiniest slip-up can expose all of your financial history to the world.

Third, the bitcoin network runs over the open internet without any encryption or obfuscation. If a bitcoin user access the internet from their home without using a VPN or other privacy technology, anyone with “man-in-the-middle” access can link bitcoin transactions to a specific person. This includes not only internet service providers but also any hacker who may be eavesdropping on the users internet traffic. Organizations like the NSA, who have access to practically every bit of information flowing over the internet anywhere in the world can easily identify users on both ends of any conventional bitcoin transaction.

Bitcoin could become the “winner” of the anonymous cryptocurrency race if a bolt-on technology like Dark Wallet becomes extremely popular. Bitcoin already has the advantage of name recognition and massive market capitalization. Anyone wishing to invest in the future of anonymous cryptocurrencies should consider keeping part of their holdings in bitcoin.

Merrill Lynch Bitcoin Valuation

In December of 2013 the investment bank Merrill Lynch initiated coverage of bitcoin. Merrill Lynch's David Woo developed a valuation model for bitcoin which attempted to determine a maximum market capitalization for the cryptocurrency based on both its ability to be a store of value and its ability to be a medium of exchange for e-commerce transactions. I replicated David Woo’s model and applied it both to past data as well as to future forecasted data. See the appendices of this book for my calculation methodology, data sources and modeling assumptions. Using this valuation model I was able to produce the following chart showing the past and future maximum valuation for bitcoins (dotted line) against the actual bitcoin price (solid line):

According to the chart I produced using the Merrill Lynch methodology, the maximum bitcoin valuation has actually been falling over time and appears to approach $1,000/btc asymptotically. The reason the valuation has dropped over time using this methodology is mainly due to the fact that the consumer money supply of “small time deposits” (like checking account balances) has been falling like a rock since 2008. Velocity of money is dependent on both the amount of money being moved around and the quantity of the money supply available to be moved around. When the money supply drops, the velocity drops. In the case of consumer spending, the “money supply” for consumers is their checking accounts, which the Federal Reserve calls “small time deposits.” As consumer checking account balances have dwindled over the past few years, the amount of money that people would have had available to hold bitcoins on hand has dwindled as well, thus pushing down the maximum bitcoin valuation. It shouldn’t be a surprise to readers that US consumers are still being squeezed. While the top 1% of US earners have done extremely well since the “great recession” ended, the bottom 99% have continued to struggle along and overall the cash available in their checking accounts has dwindled as they are pushed closer to the edge of bankruptcy. If this trend of income inequality and dwindling savings continues, it could hold back bitcoins and other cryptocurrencies from achieving their full potential. For bitcoins to truly thrive they need to adopted as a medium of exchange rather than as a store of value. If the people most likely to use them as a medium of exchange have less and less purchasing power over time, the value of bitcoins could falter.

Bitcoin Valuation Including Black Markets

The Merrill Lynch bitcoin valuation methodology included the value of bitcoins as a store of value and medium of exchange in regular e-commerce transactions, but it failed to include the value of bitcoins as a medium of exchange for the black market. Considering the black market accounts for nearly 1/4 of the global economy, this seems to be a huge oversight. What’s more, because the black market is essentially cut off from traditional forms of electronic payment such as credit cards and wire transfers, a sufficiently anonymous and secure cryptocurrency has the potential to take up a massive percentage of the transactions conducted in the black market. Perhaps the omission by Merrill Lynch of the black market impact on bitcoin valuation was due to sensitivities of a large investment bank being worried about being accused of “endorsing” the black market. Luckily, as someone who doesn’t work for an investment bank, I have no such qualms. While I do not endorse the black market, I do believe that if it adopts an anonymous cryptocurrency it could push up the valuation of that currency by a large amount.

Building on the Merrill Lynch bitcoin valuation methodology, I added in the estimated impact of black market bitcoin adoption on the bitcoin valuation. For bitcoin to be widely adopted by the global black market, an add-on anonymity technology like Dark Wallet or Darkcoin would have to “win” the anonymous cryptocurrency war. See the appendices of this book for my calculation methodology, data sources and modeling assumptions. Using this valuation model I was able to produce the following chart showing the past and future maximum valuation for bitcoins (dotted line) against the actual bitcoin price (solid line):

When you include the black market into the valuation equation for bitcoin, the maximum valuation rises to around $5,000 per bitcoin. This isn’t to say that bitcoin will certainly rise to $5,000 per bitcoin, but rather that it has the potential to rise that high if the black market embraces bitcoins because a technology like Dark Wallet or Darkcoin wins the anonymous cryptocurrency war. If bitcoins were to rise up to this valuation over a period of 3 years, it would represent an annualized return of 111% from the date of this book’s first publication (Friday the 13th of June, 2014).

6) Darkcoin (DRK)

Darkcoin (DRK)

Official Website

darkcoin.io

Decentralized Ledger

Yes

Irriversable Transactions

Yes

Anonymous Transactions

Yes

Independent Currency

Yes

Working Public Version

Yes

Proof of Stake

No

Transaction Speed

2.5 minutes

Genesis Block Date

Jan 19, 2014

Darkcoin is currently the top anonymous cryptocurrency. As of July 2014 Darkcoin has the highest market capitalization of any of the anonymous cryptocurrencies.[58]

The heart of Darkcoin’s anonymity is its implementation of the “DarkSend” system. DarkSend is an improvement on the CoinJoin system. The way CoinJoin works has been described as “Alice wants to transfer 1 BTC from address A to address B. Bob wants to transfer 1 BTC from address C to address D. CoinJoin gives them a way to combine their transfers into a single transaction that has two inputs (A and C) and two outputs (B and D). Someone observing the blockchain no longer knows which one of the outputs is Alice's and which one is Bob’s. Because of some cryptographic magic behind the scenes, the participants of the shared transaction (there can be more than two of them) do not have to trust each other. Compared to traditional Bitcoin mixers, there is no possibility of coins being stolen. Also, CoinJoin transactions are compact and incur no additional fees (besides the usual transaction fees).”[59] DarkSend improves on CoinJoin by “only allowing inputs of the same size into the DarkSend pools. These sizes are referred to as ‘denominations’ and are in powers of ten (for example, 1DRK, 10DRK, 100DRK, 1000DRK). This allows the inputs from all users to be virtually the same. Outputs per user must add up to the denomination size. Users that send less money than the denomination size will use a second “change” output. These outputs are new addresses not connected to their identity. This implementation allows for amounts of any precision to be sent without a negative impact in the quality of anonymity.”[60]

An interesting feature of Darkcoin is that Darksend transactions take place through a series of “Master Nodes.” Master Nodes are servers that are randomly selected to mix transactions through the network, thus creating anonymity for transactions. In order to run a master node, 1000 Darkcoins must be set aside and not used by the Master Node server operator.[61] In return for running a Master Node, operators are rewarded with 20% of the mining output sent to a randomly selected Master Node each time a new block is issued. At the time of this writing, it would cost about $10,000 to set up a Master Node, which would receive about $25 per day in fees from the network.[62] If the payments to master nodes stayed the same, operating a master node would give an investor nearly a 100% return on investment each year in fees alone (not including any appreciation from the rise in currency value). From an investing standpoint, the 1000 DRK requirement for running a master node also creates an incentive for people to “lock up” their investment in Darkcoins inside Master Nodes, thereby reducing the supply of Darkcoins available for exchange, which all things being equal, could cause the price of Darkcoins to rise more over time. As of this writing there are over 200 master nodes operating, which at $10,000 per node represents over $2 million of “locked up” Darkcoin market capitalization. To put it another way, about 5% of all Darkcoins are currently locked up in Master Nodes.[63]

While the main code for Darkcoin is open source, the code for the DarkSend system is currently closed, pending a code audit.[64]

In May of 2014 The Armory, a darknet marketplace that sells weapons, began accepting darkcoin.[65]

Team

The darkcoin team is led by Evan Duffield and Kyle Hagan. Combined the two have over 40 years of development experience.[66] Both have worked within the financial services industry.[67]

7) X11coin (XC)

Z11coin (XC)

Official Website

x11coin.org

Decentralized Ledger

Yes

Irriversable Transactions

Yes

Anonymous Transactions

Yes

Independent Currency

Yes

Working Public Version

Yes

Proof-of-Stake

Yes

Transaction Speed

1.5 minutes

Genesis Block Date

May 08, 2014

X11coin is an anonymous cryptocurrency that uses a mixing system similar to Darkcoin. As of July 2014 X11coin has less than 1/4 the market capitalization of Darkcoin.[68]

X11coin creates anonymity through its system of mixing nodes. “Using a decentralized pool of Xnodes, the transactions are untraceable from sender to receiver. XC’s platform takes it to the next step by using multi-path technology to relay the transaction between multiple Xnodes and split the transaction into numerous micro-transactions. This prevents any single Xnode from knowing the true source and destination of the transaction. The micro-transactions also limit risk due to the nature of splitting 1 transaction into numerous transactions spread out across a pool of Xnodes.”[69]

8) FedoraCoin (TIPS)

FedoraCoin (TIPS)

Official Website

fedoraco.in

Decentralized Ledger

Yes

Irriversable Transactions

Yes

Anonymous Transactions

Yes

Independent Currency

Yes

Working Public Version

Yes

Proof-of-Stake

No

Genesis Block Date

Dec 22, 2013

FedoraCoin is a long-shot CryptoNote contender with less than a million dollars in market capitalization as of July 2014.[70] The system uses a mixing service similar to Darkcoin and X11coin. In May of 2014 a “Twitter spat” arose between the three coins, with Darkcoin’s official twitter page linking to a forum post that accused X11coin of stealing elements of Fedoracoin for their own project.[71] Since the spat, the market capitalizations of FedoraCoin and X11coin have continued to languish far behind Darkcoin.[72]

9) Dark Wallet

Dark Wallet

Official Website

darkwallet.is

Decentralized Ledger

Yes

Irriversable Transactions

Yes

Anonymous Transactions

Yes

Independent Currency

No

Working Public Version

Yes - Alpha

Software Release Date

Jun 22, 2014

Dark Wallet is a project designed to piggyback on top of bitcoin, allowing users to transact bitcoins in complete anonymity. The Dark Wallet system works by creating a p2p network of mixing servers who send and receive bitcoins through the network with “trustless mixing.” According to Forbes, “Rather than hand a user’s bitcoins off to a typical Bitcoin laundry service that must be trusted to send back another more anonymous bitcoin, trustless mixing bundles together a collection of Bitcoin transactions and simultaneously sends them to new Bitcoin addresses that are also controlled by the same users; Since no one watching the transactions can see whose coins went where, the technique erases any ownership-identifying traces on the coins, while also avoiding the problem of trusting a third-party service to sufficiently mix the coins and not to simply steal them.”[73] The software is expected to be released as a browser plug-in for chrome and firefox, making it extremely easy for the average user to adopt.

As of July 2014, Dark Wallet is in alpha release, meaning “we're still changing things a lot and it's not safe at all to use the wallet.” Keep watching darkwallet.is for future releases.

Team

The Dark Wallet project has some heavy hitters on their team. The director of the project is Cody Wilson, who you might know as the founder of DEFCAD and inventor of the world’s first 3D-printed gun. Amir Taaki, one of the developers, is known for his work in developing the Toronto hackathon winning DarkMarket concept along with Dark Wallet developers Pablo Martin and William Swanson. Chief scientist Peter Todd has been actively contributing to the development of Bitcoin and Mastercoin and is “known in the Bitcoin community for his work on off-chain transactions, in particular finding ways to reduce or eliminate the need to trust third parties.”[74] The project’s chief economist Enric Duran has been called the “Spanish Robin Hood” by the press and is well-known for his activism for decentralized currency.

10) Zerocoin/Zerocash

Zerocoin/Zerocash

Official Website

zerocash-project.org

zerocoin.org

Decentralized Ledger

Yes

Irriversable Transactions

Yes

Anonymous Transactions

Yes

Independent Currency

Yes

Working Public Version

No

In 2013 researchers at Johns Hopkins University released a paper detailing a plan to develop a system called Zerocoin that could piggyback on bitcoin and offer improved anonymity. As the team worked to develop Zerocoin they decided to develop a separate cryptocurrency, called Zerocash, that would run completely independent of Bitcoin. It appears that Zerocash has superseded Zerocoin, as according to the Zerocash website, “Zerocash improves on an earlier protocol, Zerocoin, developed by some of the same authors, both in functionality (Zerocoin only hides a payment's origin, but not its destination or amount) and in efficiency (Zerocash transactions are less than 1KB and take less than 6ms to verify).”[75]

Zerocash is designed to be a system with two separate coins - one anonymous (Zerocoins) and one non-anonymous (Basecoins). With these two coins, “users can convert from basecoins to zerocoins, send zerocoins to other users, and split or merge zerocoins they own in any way that preserves the total value. Users may also convert zerocoins back into basecoins, though in principle this is not necessary: all transactions can be made in terms of zerocoins.”[76]

NXT is another cryptocurrency project that is looking to use the Zerocash code to add anonymity to its own transactions.[77] If successful, the NXT team would call the anonymity solution “NxtCash.”

As of this writing, the Zerocash project does not yet have a working wallet available for download. Zerocash is expected to be released between August and October of 2014.[78] Keep watching zerocash-project.org for future releases.

11) Anoncoin (ANC)

Anoncoin (ANC)

Official Website

anoncoin.net

Decentralized Ledger

Yes

Irriversable Transactions

Yes

Anonymous Transactions

Partial

Independent Currency

Yes

Working Public Version

Yes

Proof-of-Stake

No

Transaction Speed

3 minutes

Genesis Block Date

Oct 12, 2013

Anoncoin is a long-shot contender with less than a million dollars in market capitalization as of July 2014.[79] Anoncoin allows for partial anonymity by routing all traffic over the I2P anonymity network. According to the developers, “The Anoncoin client allows for all internet communication to be sent via the I2P (the Invisible Internet Project) network. By use of I2P, it becomes impossible for anyone, including an internet service provider, to determine where the Anoncoin client is being run. Though Anoncoin transactions can still be tracked by the public block chain ledger, the location at which a coin was spent is inherently untrackable.”[80] By obfuscating the user's IP address through the I2P network, Anoncoin provides an extra level of anonymity above bitcoin's pseudoanonymity. However, because the currency uses a conventional block chain, the user can still expose all of their transactions if they accidentally publicly link themselves to their block chain address.

12) Neutrino (NTR)

Neutrino (NTR)

Official Website

neutrinocoin.org

Decentralized Ledger

Yes

Irriversable Transactions

Yes

Anonymous Transactions

Partial

Independent Currency

Yes

Working Public Version

Yes

Proof-of-Stake

No

Transaction Speed

2.5 minutes

Genesis Block Date

Mar 31, 2014

Like Anoncoin, Neutrino is a currency that provides partial anonymity by running over an anonymity network. Instead of using I2P like Anononcoin, Neutrino uses the Tor network to obfuscate the user’s IP address. In the same way that Anoncoin is partially anonymous, Neutrino uses a conventional block chain

for transactions and thus is similarly partially anonymous.

13) Razorcoin (RZR)

Razorcoin (RZR)

Official Website

razorcoin.com

Decentralized Ledger

Yes

Irriversable Transactions

Yes

Anonymous Transactions

Partial

Independent Currency

Yes

Working Public Version

No

Proof-of-Stake

No

Razorcoin is a long-shot contender with less than a million dollars in market capitalization as of July 2014.[81] Like Neutrino, Razorcoin provides anonymity by running over the Tor network. Razorcoin has been accused of being a “pump and dump” scam.[82]

14) Cryptcoin (CRYPT)

Cryptcoin (CRYPT)

Official Website

cryptco.org

Decentralized Ledger

Yes

Irriversable Transactions

Yes

Anonymous Transactions

Yes

Independent Currency

Yes

Working Public Version

Yes

Proof-of-Stake

Yes

Transaction Speed

1.5 minutes

Genesis Block Date

May 21, 2014

Cryptcoin is an up-and-coming contender, breaking a million dollars in market capitalization just a week after it was introduced.[83] The secret sauce for Cryptcoin's anonymity is its "Cryptcast" algorithm. Describing the algorithm, the developers say "this method is currently one-of-kind and not found in any other cryptocurency. It has been built from the ground up amongst our team of expert dedicated professionals. The anonymous send is innovative in the fact that its function requires no active ‘masternodes’ that require coins or partially anonymous mixers. Even with triangulation no one would ever know who the owner of the public key is, capable of decrypting the message; it's fool-proof and innovative. There will be no fee for sending transfers as there are no master nodes that require payments. Transactions occur only between two wallets with full decentralized anonymity."[84]

15) Safecoin (SAFE)

Safecoin (SAFE)

Official Website

safecoin.io

Decentralized Ledger

Yes

Irriversable Transactions

Yes

Anonymous Transactions

Yes

Independent Currency

Yes

Working Public Version

No

Proof-of-Stake

“Proof of Resource”

Safecoin is the anonymous cryptocurrency of the SAFE (Secure Access For Everyone) network, which itself is part of the MaidSafe network. The MaidSafe network is a project to decentralize the internet by distributing cloud storage and website hosting across all internet users. Each user of the MaidSafe network sets aside some of their computer’s hard drive space and in return they get secure cloud storage space equal to the space they set aside for others. Each file stored on the MaidSafe cloud is encrypted and distributed across multiple other user computers around the world. If, for example, you want to share some photos with a friend, you simply upload them to the MaidSafe cloud and give your friend the key to download them from the cloud - much the way Dropbox works today. By decentralizing cloud storage and website hosting, MaidSafe could greatly speed up file sharing and website hosting while making these services resistant to hackers and denial-of-service attacks.

In April of 2014 the MaidSafe initiated a pre-sale of “MaidSafeCoins,” which will be redeemable 1:1 for Safecoins once the network is up and running.[85] In the future it is envisioned that “farmers” that provide storage space to the MaidSafe network will be rewarded with Safecoins. Safecoins are designed to be anonymous by running all transactions through the MaidSafe network, which itself is anonymous.[86]

16) Cloakcoin (CLOAK)

Cloakcoin (CLOAK)

Official Website

cloakcoin.com

Decentralized Ledger

Yes

Irriversable Transactions

Yes

Anonymous Transactions

Yes

Independent Currency

Yes

Working Public Version

No

Proof-of-Stake

Yes

Cloakcoin is a long-shot contender with less than a million dollars in market capitalization as of July 2014.[87] As of this writing, cloakcoin has not yet been released to the public.

17) Libertycoin (XLB)

Libertycoin (XLB)

Official Website

libertycoin.co

Decentralized Ledger

Yes

Irriversable Transactions

Yes

Anonymous Transactions

Partial

Independent Currency

Yes

Working Public Version

Yes

Proof-of-Stake

Yes

Transaction Speed

1 minute

Genesis Block Date

May 09, 2014

Libertycoin is a long-shot contender with less than a million dollars in market capitalization as of July 2014.[88] Libertycoin enables anonymous transactions through its “libertysend” algorithm. Libertycoin by itself will not be anonymous but will be capable of being anonymous if users use the libertysend system. According to an article on the currency, “This LibertySend feature will not be encoded into the LibertyCoin wallet itself, but rather in the Liberty Express platform. This allows any and all users & merchants to decide whether or not they want to use this feature.”[89]

18) VeriCoin (VRC)

VeriCoin (VRC)

Official Website

vericoin.info

Decentralized Ledger

Yes

Irriversable Transactions

Yes

Anonymous Transactions

Partial

Independent Currency

Yes

Working Public Version

Yes

Proof-of-Stake

Yes

Transaction Speed

1 minute

Genesis Block Date

Jan 09, 2014

VeriCoin is a top-20 altcoin based on market capitalization as of July 2014.[90] VeriCoin enables anonymous transactions through its “VeriSend” system, which “utilizes ring nodes, random transaction send amounts, and various other techniques to hide the send/receive connection from the world.”[91] Unlike other cryptocurrencies, VeriCoin is not anonymous by default and users must actively remember to use the “VeriSend” to ensure anonymity.

VeriCoin also has a very interesting feature called “VeriBit” that allows any vericoin user to spend their vericoins anywhere that bitcoins are accepted.[92]

19) BlackCoin (BC)

BlackCoin (BC)

Official Website

blackcoin.co

Decentralized Ledger

Yes

Irriversable Transactions

Yes

Anonymous Transactions

Partial

Independent Currency

Yes

Working Public Version

Yes

Proof-of-Stake

Yes

Transaction Speed

30 seconds

Genesis Block Date

Feb 23, 2014

BlackCoin is a top-10 altcoin based on market capitalization as of July 2014.[93] BlackCoin enables anonymous transactions through its “BlackHalo” and “BitHalo” systems. These systems are described by the developers as a “multi-signature two party double deposit trustless escrow in cryptographic networks.”[94] Like VeriCoin’s VeriSend system, BlackCoin’s BlackHalo and BitHalo systems are not enabled by default and users must actively engage them to ensure anonymity.

20) PinkCoin (PC)

PinkCoin (PC)

Official Website

crypto.pink

Decentralized Ledger

Yes

Irriversable Transactions

Yes

Anonymous Transactions

Partial

Independent Currency

Yes

Working Public Version

Yes

Proof-of-Stake

Yes

Transaction Speed

30 seconds

Genesis Block Date

May 5, 2014

PinkCoin is a long-shot contender with less than a million dollars in market capitalization as of July 2014.[95] PinkCoin allows for anonymity through its “Pink Entanglement Engine.”[96] Like VeriCoin’s VeriSend system and BlackCoin’s BlackHalo and BitHalo systems, PinkCoin’s “Pink Entanglement Engine” is not enabled by default and users must actively engage it to ensure anonymity.

21) NavajoCoin (SUM2)

NavajoCoin (SUM2)

Official Website

none

Decentralized Ledger

Yes

Irriversable Transactions

Yes

Anonymous Transactions

Unknown

Independent Currency

Yes

Working Public Version

Yes

Proof-of-Stake

Yes

Transaction Speed

30 seconds

Genesis Block Date

Apr 22, 2014

NavajoCoin, formerly known as SummerCoinV2, is a long-shot contender with less than a million dollars in market capitalization as of July 2014.[97] NavajoCoin claims to provide anonymity through its “Navajo Anonymous Technology.”[98] NavajoCoin does not have an official website as of July 2014.

22) VootCoin (VOOT)

VootCoin (VOOT)

Official Website

vootcoin.com

Decentralized Ledger

Yes

Irriversable Transactions

Yes

Anonymous Transactions

Yes

Independent Currency

Yes

Working Public Version

Yes

Proof-of-Stake

No

Transaction Speed

1 minute

Genesis Block Date

Jun 3, 2014

VootCoin is a long-shot contender with less than a million dollars in market capitalization as of July 2014.[99] VootCoin provides anonymity through its “NiteSend” algorithm. VootCoin also plans to implement a fully-decentralized marketplace called “VootMarket” which will allow people to trade real-world goods and services through an “integrated escrow system based on a Web of Trust (WoT).”[100]

23) CryptoNote

CryptoNote (cryptonote.org) is a technology that cryptocurrencies can adopt to make them anonymous. The basis of the CryptoNote technology is a “ring signature” where cryptographic keys are sent and verified as part of a group instead of being verified individually. According to the developers, “The main distinction with the ordinary digital signature schemes is that the signer needs a single secret key, but a verifier cannot establish the exact identity of the signer. Therefore, if you encounter a ring signature with the public keys of Alice, Bob and Carol, you can only claim that one of these individuals was the signer but you will not be able to pinpoint him or her.”[101]

One of the main criticisms of “ring signature” cryptocoins is that because the transactions are larger in size than on conventional cryptocurrencies, the blockchain will “bloat” over time. As of this writing, the bitcoin blockchain has performed 41,186,934 transactions and is about 18,627 MB in size.[102] This works out to about 2,200 transactions per MB. At the same time, the Monero blockchain (which uses ring signatures) has performed 93,328 transactions and is about 552 MB in size.[103] This works out to about 170 transactions per MB, or about 13 times more space per transaction. With a T1 internet connection it would take about 24 hours to download the current bitcoin blockchain.[104] If a “ring signature” blockchain like Monero’s handled as many transactions as the Bitcoin blockchain handles, at 13 times the size, it would take nearly two weeks to download. Very few people have the patience to wait a fortnight just to perform a simple financial transaction. While storage space on computers is rapidly getting cheaper over time, internet bandwidth is not advancing at the same rate due to internet service provider monopolies like Time Warner and Comcast failing to build out bandwidth fast enough. Indeed, while hard drive storage density doubles every 13 months under Kyder’s Law, and processing speed doubles every 18 months under Moore’s Law, internet bandwidth only doubles every 20.5 months under Nielsen's Law. Thus, blockchain bloat could seriously hamper adoption rates if people are unable to sync their wallets to the network in a reasonable period of time. Blockchain bloat could also seriously hamper the anonymity of a currency if people begin to use centralized wallet services to avoid having to wait a long time to download the blockchain. It is also feasible that someone who wants to destroy a CryptoNote currency (such as the NSA or another cryptocurrency competitor) could purchase some of the currency and "spend" the currency to bloat the blockchain. They could do this by making millions of transactions for the smallest possible denomination back and forth between wallets they controlled. Each transaction would cost them a small fee, but would add bloat to the blockchain. By the time they had burned through all of their coins in fees, the blockchain would be significantly more bloated, potentially rendering the whole currency unusable for the average person. It is for these reasons that investors should very carefully consider the risks before investing in a CryptoNote currency.

The following cryptocurrencies implement the CryptoNote algorithm…

24) Monero (XMR)

Monero (XMR)

Official Website

monero.cc

Decentralized Ledger

Yes

Irriversable Transactions

Yes

Anonymous Transactions

Yes

Independent Currency

Yes

Working Public Version

Yes

Proof-of-Stake

No

Transaction Speed

1 minute

Genesis Block Date

Apr 18, 2014

Monero is the largest of the CryptoNote currencies by market capitalization, as of July 2014.[105] Monero also has the fastest block generation speed of any of the CryptoNote currencies.[106] This faster block generation speed should result in faster transaction speed. The Monero development team is also currently working to make their coin run over the I2P anonymity network.[107]

25) Bytecoin (BCN)

Bytecoin (BNC)

Official Website

bytecoin.org

Decentralized Ledger

Yes

Irriversable Transactions

Yes

Anonymous Transactions

Yes

Independent Currency

Yes

Working Public Version

Yes

Proof-of-Stake

No

Genesis Block Date

Jul 4, 2012

Bytecoin was the first cryptocurrency to use the CryptoNote technology. As of July 2014, Bytecoin also has the highest market capitalization of the CryptoNote currencies.[108] Bytecoin allegedly had one of the largest premines of any cryptocurrency, with 80% of all supply being distributed in the premine before the currency was released to the public.[109]

26) DuckNote (XDN)

DuckNote (XDN)

Official Website

ducknote.org

Decentralized Ledger

Yes

Irriversable Transactions

Yes

Anonymous Transactions

Yes

Independent Currency

Yes

Working Public Version

No GUI

Proof-of-Stake

No

Transaction Speed

4 minutes

Genesis Block Date

May 30, 2014

DuckNote is a long-shot CryptoNote contender with less than a million dollars in market capitalization as of July 2014.[110]

27) Fantomcoin (FCN)

Fandomcoin (FCN)

Official Website

fantomcoin.org

Decentralized Ledger

Yes

Irriversable Transactions

Yes

Anonymous Transactions

Yes

Independent Currency

Yes

Working Public Version

No GUI

Proof-of-Stake

No

Transaction Speed

1 minute

Genesis Block Date

May 06, 2014

Fantomcoin is a long-shot CryptoNote contender with less than a million dollars in market capitalization as of July 2014.[111]

28) Quazarcoin (QCN)

Quazercoin (QCN)

Official Website

quazarcoin.org

Decentralized Ledger

Yes

Irriversable Transactions

Yes

Anonymous Transactions

Yes

Independent Currency

Yes

Working Public Version

No GUI

Proof-of-Stake

No

Transaction Speed

2 minutes

Genesis Block Date

May 08, 2014

Quazarcoin is a long-shot CryptoNote contender with less than a million dollars in market capitalization as of July 2014.[112]

29) Boolberry (BBR)

Boolberry (BBR)

Official Website

boolberry.org

Decentralized Ledger

Yes

Irriversable Transactions

Yes

Anonymous Transactions

Yes

Independent Currency

Yes

Working Public Version

Yes

Proof-of-Stake

No

Transaction Speed

2 minutes

Genesis Block Date

May 17, 2014

Boolberry is a long-shot CryptoNote contender with less than a million dollars in market capitalization as of July 2014.[113] Boolberry was formerly called “HoneyPenny.”[114] The Boolberry developers have coded the software so that 1% of all supply goes directly to them.[115]

30) MonetaVerde (MCN)

MonetaVerde (MCN)

Official Website

monetaverde.org

Decentralized Ledger

Yes

Irriversable Transactions

Yes

Anonymous Transactions

Yes

Independent Currency

Yes

Working Public Version

No GUI

Proof-of-Stake

No

Transaction Speed

1 minute

Genesis Block Date

Jun 17, 2014

MonetaVerde is a long-shot CryptoNote contender with less than a million dollars in market capitalization as of July 2014.[116]

31) Aeon (AEON)

Aeon (AEON)

Official Website

aeoncoin.net

Decentralized Ledger

Yes

Irriversable Transactions

Yes

Anonymous Transactions

Yes

Independent Currency

Yes

Working Public Version

No GUI

Proof-of-Stake

No

Transaction Speed

1 minute

Genesis Block Date

Jun 06, 2014

Aeon is a long-shot CryptoNote contender with less than a million dollars in market capitalization as of July 2014.[117]

32) Staying Anonymous

If you want to increase your privacy and anonymity while using anonymous cryptocurrencies, there are a number of steps you can take. The following steps range from steps everyone should take to ensure their online privacy to steps that only an extremely paranoid person should take.

Create a Secure Computer

It is a good idea to only conduct cryptocurrency transactions through a secure computer. Most Mac and Windows computers broadcast a continuous stream of identifying data when you are connected to the internet. It is a trivial matter for people to link your online activity with your personal identity when using these operating systems. Additionally, there are now a number of viruses out in the wild that are specifically designed to search your hard drive and steal your bitcoins and other cryptocurrencies. For these reasons, it is best to use a secure operating system when dealing with cryptocurrencies.

One of the revelations that came out of the Edward Snowden leaks is that the NSA intercepts laptops and other computer hardware as they are being shipped from online retailers to customers.[118] Once the package is intercepted the NSA can install snooping viruses or even install additional hardware like a cell phone data transmitter that allows them to see everything you do on the computer. For this reason, it is best to purchase your secure laptop anonymously. You can simply head to a used computer store or purchase a laptop from Craigslist and pay in cash.

Once you have acquired your secure computer, you can take a number of steps to secure it further. Because certain viruses can give people the ability to remotely activate your computer’s camera and microphones, it is wise to cover them with electrical tape. If you don’t plan on using the computer for video conferencing or VOIP calls it can also make sense to open up the computer and pry out these components. If you plan on booting your computer from a Live DVD or USB drive, you can also remove the internal hard drive. If you plan on using an external USB wifi connector, you can also remove the existing internal wireless card.

One of the most secure operating systems at the moment is Tails (tails.boum.org). Tails is a hardened linux distribution that forces all internet traffic to run through the Tor network. The Tor network is an anonymity network that runs on top of the existing global internet. When you connect to the Tor network your internet traffic is bounced through a number of servers. Each server strips the details of the previous server away so the last “exit node” server has no idea where the traffic originated from. It’s not perfect, but it’s one of the best privacy technologies that exists at the moment. Connecting to the Tor network also allows you to gain access to all of the darknet sites, such as the Silk Road, that exist only through Tor servers. Tails is designed to be booted as a Live DVD or Live USB, where everything being booted comes from a read-only volume. This makes Tails a “leave no trace” operating system - once you’ve powered down your computer, there is no data left on your computer to show what you have been doing.

Create a Secure Wallet

Securing your cryptocurrency wallet is extremely important. Within the software itself, you should always encrypt your wallet. To further enhance your security, you can store your encrypted wallet on an encrypted USB drive. IronKey makes a number of USB drives that use hardware encryption and will self-destruct if they are tampered with. If you want to take your security a step further, you can put your digital wallet inside a “hidden volume” on your secure USB drive by using Truecrypt software. Truecrypt allows you to create encrypted volumes that can be opened with two different passwords. One password opens a “clean” volume that you would be willing to show to people and the other password opens a hidden volume that you would not be willing to show people. When securing your cryptocurrency wallets, it might make sense to store a small amount of currency in a “dummy” wallet on the clean volume while holding the majority of your currency on the hidden volume. This way, if someone tortures you for your password (or you are required to disclose it in court), you can give them the password for the “clean” volume and still maintain plausible deniability about the existence of any hidden volume. It should be noted that Truecrypt mysteriously shut down operations in May of 2014 with some wondering whether the software had been compromised by the NSA.[119] As of July 2014 there is no comparable replacement.

Steganography is another method of hiding your cryptocurrency wallet in plain sight. Steganography is the art of hiding messages within other messages. A hundred years ago this might involve sending someone a long message but having the “true” message spelled out by every third letter in the text. Today digital steganography software can allow people to hide any data inside of other data. For example, you could hide your encrypted cryptocurrency wallet inside of a digital photograph, upload it to a photo sharing website and download it again to another computer without anyone knowing you had sent your wallet across the internet. Like truecrypt’s “hidden volumes,” steganography is a type of “deniable encryption” that allows people to store their encrypted cryptocurrency wallets without having anyone know that they exist. Unfortunately, the need for deniable encryption appears to be rising. Key disclosure laws exist on the books in many jurisdictions around the world. In such places, if a court finds an encrypted file on your computer and you fail to provide the password to decrypt it, they can jail you until you agree to give the court your password. Under these laws you are guilty until proven innocent - claiming to have forgotten your password is not an adequate defense. By encrypting your wallet and hiding it within another file using digital steganography, you can create plausible deniability and protect yourself from such draconian laws.

Travel Untraceably

Depending on how private you need your transactions to be, it can be beneficial to travel in an untraceable manner to the destination where you plan to connect to the internet.

It is theoretically possible for a government agency like the NSA to track you in a number of ways. Your mobile phone is perhaps the easiest source of tracking. With access to the mobile phone networks, agencies can track your whereabouts in real time. They can also easily monitor your phone calls, texts and internet traffic. It is also possible with some phones for an agency to turn on the microphone of your phone and listen in real time to anything you are doing. When traveling to the destination where you plan to connect to the internet, simply leave your smartphone at home.

Cars can be just as easy as phones to track. Many cars now have built-in GPS systems with mobile communications. The “OnStar” system in General Motors cars is the most well known, but almost all car makers now have a similar system, from the “Lexus Link” to the “BMW Assist” system. These telematic systems can allow a government agency to monitor your car's whereabouts in real-time and some are even capable of listening in on you in real-time using the car's built-in microphone. If you have an older car without one of these systems, the FBI can easily place a GPS tracking device under your car. It is also possible to track the movement of your car through its license plate. CCTV cameras can be linked together into a large network and can read every license plate number of every car in a city. If you have an electronic toll collection system in your car, such as E-ZPass, E-Toll or FasTrak, these systems use RFID chips to identify your vehicle to the toll system. These systems can also be used to track your vehicle’s movement. So leave your car at home.

More untraceable methods of travel are walking, biking, taxi, bus or train. If you travel by public transportation, via a bus or train, it is possible to track you using your transport pass. These systems keep a record of every origin and destination you take on the system. If you plan to travel using public transit, leave your regular transit pass at home and purchase a one-time-use pass at the station using cash. If you travel by taxi, pay cash.

CCTV cameras can also track you. Using facial recognition, agencies can monitor thousands of cameras throughout a city and track a specific person by comparing the faces of the thousands of people passing by those cameras to a target face. Using “gait recognition,” these same agencies can pick a person out of a crowd by matching their pre-analyzed walking gait to the gaits of thousands of other people walking around at any time. If you want to be really paranoid, wear a hat and sunglasses to cover your face from these cameras and tape up one of your legs with athletic tape to change your gait.

Personal RFID tracking is another possibility. Radio-frequency identification (RFID) tags are small passive (non-battery operated) radio transmitters that are used to track merchandise in stores. Many clothes now have RFID tags sown in next to the normal brand label tag. Since 2006, all US passports now contain RFID chips. Many credit cards and some phones now contain RFID chips. At the 2010 DEFCON hacker conference, Chris Paget showed that it is possible to read RFID tags from over 20 meters away.[120] It is theoretically possible for an agency with enough resources to track people by setting up a grid of these remote RFID readers throughout a city. In order to travel to your destination in an untraceable manner, you should make sure you travel without any RFID tags. Inspect your clothing and cut off any RIFD tags. Leave any RFID-enabled credit cards, RFID-based transportation passes or any other RFID-enabled cards at home.

When traveling to your internet destination, all you should have with you is your secure computer and some cash. Before you leave your home, don’t forget to pull the battery out of your computer to ensure that the wifi and bluetooth transmitters are not operating while your are traveling.

Connect Anonymously to The Internet

To be truly anonymous on the internet, you should take advantage of open wifi networks in your city. Cafes often have free open wifi to encourage patrons to stay longer and buy more. If you want to be truly paranoid, you should never connect to the same wifi network twice. Each time you want to use the internet on your secure computer, you should pick a random place in the city, travel there untraceably and then never visit that place again. If you plan to sit in the cafe while using the wifi, pay for your meal or coffee using cash only. A more secure alternative to sitting in the cafe itself is to access the cafe’s internet from a distance. Directional wifi antennas can allow you to connect to wifi networks from a fairly large distance. You can be sitting in the park across the street from a cafe and connect to their wifi. If people are out to get you and are looking at surveillance footage, you can be a hundred paces away from where they think you are. The company Alfa makes a nice USB wifi adaptor with a high-gain directional panel antenna.

The number 1 rule when connecting to the internet with a secure computer is don’t log in to any account that is traceable to you. Don’t log in to facebook, don’t log in to gmail, don’t log in to twitter. Don’t log in to any service that you have previously logged in to with a non-secured computer. If you want to take your paranoia to the next level, you shouldn’t even visit any websites on the secure computer that you would normally visit on your non-secured computer. Are you a big fan of Manchester United football? Don’t look up their scores while you’re on the secure computer!

Once you’ve successfully connected to the internet using your secure computer, you can create your cryptocurrency wallets without having to worry about them being traced back to you.

Anonymize your Cash

If you plan to purchase cryptocurrencies using cash, you can add a layer of anonymity by creating “clean” cash. All cash is traceable because it has a serial number on it. Every time you pull cash from the ATM, it is theoretically possible for the NSA or another government agency with access to the banking system computers to keep a database of every ATM transaction in the world and link the serial numbers of the bills taken out to the person who took them out. At the end of the night when a coffee shop deposits their money, it may be possible for the NSA to keep a record of the serial numbers on the bills deposited and match them to bills taken out of ATMs earlier in the day. If someone repeats the rhythm of such a transaction by taking cash out of an ATM and buying cryptocurrencies at the same place each time, it may be possible to link a currency transaction to that person.

To create anonymous cash, simply keep two sets of cash on your person. Keep the ATM cash in your wallet. Always pay for things with the largest bills you can to get as much change back as possible. Keep the change you receive from these transactions in a separate pocket. This separate pile of money is your “clean money” that doesn’t have serial numbers linked to your ATM account. Use this clean money to buy your cryptocurrencies.

Concoct a False Digital Alibi

Depending on how badly a person needs to stay anonymous, it is possible to concoct a false alibi. While concocting a real-world false alibi, like buying a movie ticket and escaping out the back door, can be helpful, concocting a false digital alibi can perhaps be more useful when a person’s assailants are tracking them digitally. Using automation software like macro-generators, it is possible for someone to set up a script on their computer that would "go through the motions" of a typical day. At 8am it might click through a few random news articles online. At 9am it might send out a few emails. At 10am it might comment on some blogs and send some messages through Facebook. At 11am it might log on to the user's bank website to check their checking balance. At noon it might purchase “Anonymous Cryptocurrencies" on Amazon (although that might be suspicious!). All of these actions would be linked to the home IP address of the user. To an outside agency like the NSA, it might look as if the person was at home using their computer when in fact they were at a random cafe accessing the Tor network through their secure computer.

Get an Anonymous Email Address

Before buying cryptocurrencies it is usually necessary to create an email account in order to communicate with sellers. It is important to choose an email service provider that will guarantee your anonymity. The service should explicitly state that they keep no IP logs. Ideally, you should also choose a service that is located in a different jurisdiction than yours. If you live in Australia, for example, you might want to use a Russian email service. By using different jurisdictions, you make it harder for the government in your country to request information from the email company in another country. You should also require everyone you communicate with to use PGP encryption. All of your emails should be encrypted. Delete your old emails regularly. Obviously you should only use this email account for cryptocurrency transactions and you should never send any information via this email which can be linked back to you. It is extremely important that you never log in to your “secure” webmail account with a non-secure computer. In order to increase your security, you can create a new email account with a different service provider for each transaction you do. The Electronic Frontier Foundation (EFF) suggests hushmail.com.[121] Privacy researcher Runa Sandvik recommends guerrillamail.com.[122] The book “How to Be Anonymous Online” (which I highly recommend) suggests safe-mail.net.

Buy Cryptocurrencies

Physical trading is perhaps the most secure way to purchase cryptocurrencies. There are a number of online forums and websites devoted to connecting buyers and sellers of cryptocurrencies. These buyers and sellers can then agree to both bring their laptops to a cafe and exchange cash for cryptocurrencies. Depending on the jurisdiction and/or how eager both parties are to follow the letter of the law, no one needs to know the other person’s name and the transaction can take place completely anonymously. If you want to be really paranoid, wear a fake mustache. Be warned, however, that physical trading carries risks. While you may be trading with someone who has a good online rating, it is still possible to get robbed. It is also possible to run afoul of anti-money laundering laws depending on what jurisdiction you are trading money in and it is possible that the person you are trading with is part of a sting operation. Such worries are not unfounded; In 2014 two men in Florida were arrested for anonymously trading large sums of bitcoins in person.[123]

ATMs are the next best thing after physical trading. Bitcoin ATMs are popping up all over the world. Many are so-called “two-way” ATMs that allow people to both deposit and withdraw fiat currencies. It is only a matter of time until these bitcoin ATMs are upgraded to handle all manner of anonymous cryptocurrencies. The downside to cryptocurrency ATMs is that many of them require the user to enter personally identifying information before engaging in transactions. The world’s first bitcoin ATM, located in a Vancouver coffee shop and operated by Robocoin, requires users to scan a government ID and submit a handprint.[124] Other ATMs are even more invasive. Bitculus ATMs require “4 scans of their hand print, a phone number, a photograph and government ID simply to complete a Bitcoin transaction.”[125] While Robocoin and Bitculus ATMs have no anonymity, ATMs from other companies like BitAccess provide the potential for anonymity. BitAccess requires only a mobile phone number in order to verify transactions below $3,000.[126] Users can simply buy a prepaid phone using cash, thereby making their cryptocurrency transaction more anonymous. Check out bitcoinatmmap.com for a current map of cryptocurrency ATM locations.

The next most anonymous method of purchasing cryptocurrencies is using online brokers that accept money orders from companies like Western Union and Moneygram. With these services, you can show up at a Western Union office with cash, send the money order to the broker and receive cryptocurrencies directly to your digital wallet. When sending less than $500, Western Union and Moneygram typically require users to fill out a form with their first and last name, address and phone number.[127] Some locations require a photo ID to send money and some do not, so it is feasible that someone could fill out the form with false information and receive cryptocurrencies anonymously. Consult your lawyer to see if such action is legal in your jurisdiction before trying it.

The last and least anonymous way to purchase cryptocurrencies is through online exchanges that accept wire transfers. Obviously when you send a wire transfer from your checking account the money is linked directly to your identity.

Anonymize Your Coins Further

Once you have purchased some anonymous cryptocurrencies, it is possible to further anonymize them by converting them back and forth between other cryptocurrencies. For example, you could buy bitcoins with US dollars in person, then buy darkcoins with bitcoins on an online exchange, then buy X11coins with darkcoins on a second exchange and then buy darkcoins with X11coins on a third exchange and send them back to your wallet. If you perform each of these transactions using a secure computer from a different location and use different exchanges and only use an account once on each exchange, it would be extremely difficult for a surveillance agency to follow the movement of money through all of the different exchanges and blockchains. While this method of anonymizing money can be expensive (as fees must be paid at each step along the way), it can be beneficial for someone requiring extreme financial anonymity.

Avoid Counterparty Risk

The safest place to hold your cryptocurrency is on an encrypted wallet that only you know the password to on a secure computer that only you have access to. Far too many people leave far too much of their cryptocurrnecy wealth in other people’s hands by leaving it on exchanges and marketplaces. These third parties can disappear and steal your cryptocurrency at any second. Mt Gox is the best-known example of an exchange going bankrupt and taking its clients money with it. When Mt Gox fell they took nearly half a billion dollars with of bitcoins with them.[128] That’s nearly half a billion dollars of wealth that could still be in the hands of its rightful owners if they had just kept it on their own encrypted wallets instead of trusting it to a third party exchange. While Mt Gox gets all of the attention due to the size of its collapse, countless other smaller websites have disappeared, taking their clients currencies with them. Simply put, don’t put any more money on to third party websites than you are willing to lose.

Don’t Do Illegal Things

Don’t use this knowledge to do illegal things. Conventional police investigation techniques can still be used to determine the identity of a criminal even if they follow these anonymizing techniques. How? Let's say someone wanted to send a threatening letter to another person. In the old days, they would send a handwritten letter by postal mail. The police would have an origin zip code of the letter, fingerprints on the letter and handwriting from the letter to perform handwriting analysis against. The police could then interview the recipient of the letter to come up with a list of suspects - scorned lovers, ex business partners, etc. - and could try to match them against the circumstantial and physical evidence from the letter. Perhaps they could find a suspect who lived in the zip code where the letter originated and compare their handwriting to the handwriting on the threatening letter. Today, a person wanting to send a threatening letter might send an email from an anonymous email service provider that they had accessed through an anonymity network protocol like Tor. The email received by the victim would have a timestamp and could be analyzed for writing style. Again police could use old-fashioned investigative techniques to find the culprit. The police could get warrants to analyze mobile phone records to determine the location of each suspect at the time the message was sent. Then, by interviewing each suspect they could find those with the weakest alibis and compare their writing style to the writing style of the message. Maybe one suspect makes the same grammatical errors in their normal writing as were seen in the message. Given these links it may be possible to prove guilt in court. If the criminal is up against an organization like the NSA, which has the ability to monitor every single piece of traffic on the internet, it is possible for the organization to create a list of every IP address that was sending a packet into the Tor network at the second that the message came out of the Tor network. It is then a just matter of linking those IPs to known parties to shorten the list down to a list of possible suspects.

It is also important to note that encryption algorithms are not secure indefinitely. On a long enough time scale, all current encryption algorithms will likely be broken. A piece of encrypted evidence could be stored for many years and decrypted once the decryption technology has evolved. The NSA’s Utah Data Center may be capable of storing a yottabyte of information - approximately equal to all of the internet traffic in the world in a year.[129] Given these capabilities, it is a trivial matter for such an agency to hold massive amounts of digital evidence for many years until they are capable of cracking the encryption. Depending on the severity of the crime, there might not be a statute of limitations and the criminal could be found and brought to justice once the encrypted evidence is cracked. The point is, just because you think you are anonymous, you are not immune from prosecution, so don’t break the law.

33) Who Will Win?

Behavioral Economics

Under classic economic theory, people are rational actors who together have all available information. When these rational actors come together in the market the price they assign collectively to any asset is always “right.” We see this thinking in play with the efficient-market hypothesis and the capital asset pricing model (CAPM), which underpins modern portfolio theory (MPT). On the other side of the debate is a group of economists who believe that market failures can exist and prices can become irrational and produce market bubbles. The study of these psychology-induced market failures is known as behavioral economics. In 2013 the Nobel prize in economics was split between Eugene Fama, Lars Peter Hansen and Robert Shiller. Fama and Hansen represent the “Chicago School” of economists who believe in rational markets, while Shiller represents the “New Keynesian” school of economic thought, which believes that market failures can and do exist. By giving the prize to both schools of thought, the organization essentially told the world that both schools are right some of the time and neither is right all the time.

As financial instruments, the pricing of cryptocurrencies falls under these economic schools of thought. Under classic economic thinking, the price for bitcoins or any other cryptocurrency should be “right” at any given time, but behavioral economics teaches us that many market failures exist as the result of failures in human psychology. Due to the small size of these markets, it is possible for human psychology to throw the valuation of these assets into bubbles. In what is known as the “greater fool theory,” investors that suspect that a currency is entering a bubble will often still invest because they believe that there is a “greater fool” who will invest after them.

Price bubbles appear to occur frequently with all cryptocurrencies. Bitcoin has undergone three major bubbles, with the first peaking on 6/9/2011, the second peaking on 4/9/2013 and the third peaking on 11/29/2013. When we normalize the prices and chart these bubbles together, we see that they all follow roughly the same parabolic rise followed by a peak and crash. Any cryptocurrency investor seeing such a parabolic rise should be concerned with a potential crash.

Cryptocurrencies frequently violate the classical economics “law of one price.” This law states that if an asset is listed on multiple markets, traders should arbitrage price differentials until the asset has a single price on all markets. When looking at the price of bitcoin, we see that prices differ by a few percent between markets.[130] For smaller cryptocurrencies, these price differentials can be even higher.[131] Any arbitrageur worth their salt would be extremely tempted to go on to one exchange and “buy low,” transfer the coins to the other exchange and “sell high.” The reason the law of one price is violated for cryptocurrencies is that there exist significant limits to arbitrage on these markets. The most important limit to arbitrage is the counterparty risk associated with these exchanges. Any one of these exchanges can disappear at any second, stealing all of a trader’s coins or fiat currency. Right before Mt Gox imploded, many people noticed that the price differential between Mt Gox and other exchanges grew to immense proportions. Towards the end, you could have made a 20% return by simply buying bitcoins on another exchange and selling them on Mt Gox.[132] Of course most knowledgable traders avoided this arbitrage because they could smell blood and knew that the end of Mt Gox was imminent. Towards the end, Mt Gox halted all withdrawals, preventing any further chance of arbitrage and stranding traders who were in the middle of such an arbitrage trade.[133] Cryptocurrency investors should be extremely weary of exploiting price differentials between exchanges. The market talks and often it can tell you to steer clear of bad actors with price signals.

In what is known in economics as the “nominal share price problem,” people seem to take an asset’s nominal price as an indication of its overall value without taking into account the full market capitalization of the asset.[134] This cognitive bias causes people to invest in a company with a stock price of $10 and 10,000,000 shares outstanding but avoid a company with a stock price of $100 and 1,000,000 shares outstanding. Both companies have exactly the same market capitalization but due to cognitive biases, the company with the $10 stock price seems like a “better deal” to people. This is one of the reasons why most companies will perform a “stock split” when the nominal price of their stock gets too high. Because most cryptocurrencies have a set supply of coins, it is impossible to perform a “split” when the price gets “too high.” For this reason, cryptocurrencies that have a larger base of coins may look like a “bargain” to people while cryptocurrencies with fewer coins and a higher nominal price (like bitcoin) may look “overpriced” to some investors, thus hurting adoption. While cryptocurrencies can be divided into almost infinitely small parts, and corporate stock shares cannot, people should still be aware of the psychological tendency of other investors to become weary of currencies with a nominal value that is deemed "too high."

Market manipulation can easily occur with cryptocurrencies. Because there is practically no government oversight of these markets, people easily can “pump and dump” these currencies. This can be accomplished by buying a large amount of a cryptocurrency, spending some money to raise its profile through advertising and PR stunts and then selling the currency after the price has risen. For cryptocurrencies that are “premined” (where the creator gets a large amount of the initial coins), it is extremely tempting for the creator to “pump and dump” their currency by building up excitement so their coins valuation rises before “cashing out” and selling their hoard of coins. Jason Curby, the founder of NobleCoin, wrote an incredibly candid assessment of the current market manipulations taking place in the altcoin space called “The State of Alternative Cryptocurrency.”

Built-in inflation rates can also have a major impact on the valuation of cryptocurrencies. Bitcoin has a built-in inflation rate (governed by how many coins are distributed to miners each day) that declines over time. In 2014 the inflation rate is less than 15% per year and by 2017 the inflation rate should drop below 10% per year.[135] If the adoption increases at a faster rate than the inflation rate, the price of bitcoins would rise over time. Each altcoin has its own inflation rate. Terracoin has one of the highest inflation rates of the altcoins[136] and, possibly as a result of this high inflation rate, its value crashed in the first 6 months of 2014.[137] If adoption rates are equal between two cryptocurrencies, the one with the lower inflation rate will have a higher price appreciation rate, rewarding early investors. Unfortunately, investors can’t simply buy the altcoin with the lowest inflation rate and be assured of high returns on their investment. Cryptocurrencies must strike a delicate balance with their built-in inflation rates between rewarding early investors (with a low inflation rate) and preventing a deflationary spiral (with a high inflation rate), where people hoard the currency as the price rises, thus collapsing the economy as fewer and fewer people use the currency for actual transactions. Some bitcoin proponents argue that a deflationary spiral cannot happen, because cryptocurrencies are fundamentally different from debt-based fiat currencies.[138] Other observers, such as The Economist, believe that a deflationary spiral can still hit cryptocurrencies like bitcoin.[139] For anyone seriously considering a long-term investment in a cryptocurrency, it is very important to calculate the inflation rate and compare it against the investor’s expectations of the currency's adoption rate. For a good analysis of the inflation rates of various cryptocurrencies, visit the “Investor's Investigation Into The Mining Statistics Of Bitcoin Alternatives” wiki.

Finally, if you invest in the right cryptocurrency and its value increases significantly, you should avoid falling victim to the “house money effect.” This psychological effect is most noticeable when gamblers play at a casino. Once a gambler is up, they are playing with “house money” and often take much larger risks than they would with their own money. If you invest $100 in a cryptocurrency and the value rises to $1000, you should ask yourself “would I gamble $900 of my own money on this currency?” If you were originally only willing to gamble $100 on the currency, then the answer is probably “no” and you should cash out some of your profit.

Metcalfe’s Law

It is anybody’s guess who will win the battle to become the world’s most-used anonymous cryptocurrency. In the world of cryptocurrencies, valuations are based not just on who can develop the best technology but who can market it the best. A team that can garner a lot of attention in the popular media is more likely to gain investors, which can result in a virtuous cycle of greater adoption and more money available for the team to hire more developers to further improve their currency. Teams that make their currency easy to use, by providing simple windows-based software and mobile apps, should also see increased adoption. Teams that make it easy for investors to buy their currency, by convincing online exchanges and ATM manufacturers to support them, will also see increased adoption. The winner will be the team with equal parts technological genius and marketing savvy.

One of the best resources to see which altcoin is winning the anonymous cryptocurrency battle is coinmarketcap.com. This website tracks the market capitalization of over 300 altcoins. Simply put, a higher market cap means a technology is more likely to beat its competition. Money talks, and the winner of the anonymous cryptocurrency battle will be the technology that can gain the greatest adoption. Over the long run, cryptocurrency adoption will likely fall under Metcalfe's law, which states that the value of a network is proportional to the square of the number of users. This is sometimes called the “network effect.” If only two people on earth have telephones, the technology is useful, but when everyone on earth has a telephone, the technology is indispensable. Once one of these anonymous currencies has reached a critical mass of users, it will be extremely difficult for its competitors to overthrow its position. We’ve seen this again and again from VHS and Beta to Blu-ray and HDDVD. When there are multiple technologies vying for the same customer base, it usually results in a winner-take-all endgame.

The counter argument to this winner-take-all scenario is a continued fragmented landscape. People around the world speak thousands of languages. Obviously it would be easier if we all just spoke one language globally, but billions of people continue to speak different languages. The counter argument to this counter argument is that with languages, one single language has taken over the others. English is the de facto language of global business.[140] If you had to give a child advice on which language they should "invest in," learning English would be most likely to give them a leg up in their career. The same could be said about search engines - many exist (Bing, Yahoo, DuckDuckGo, etc.) but one dominates (Google). It is likely that many cryptocurrencies will exist in the future, but due to the network effect, it is also likely that one will dominate the others in popularity.

One thing is for sure - the demand for anonymity in our financial markets is enormous. Cryptocurrencies are the future of financial anonymity and investors in the winning anonymous cryptocurrency stand to make a handsome profit.

Appendix

Merrill Lynch Bitcoin Valuation

The calculation methodology is as follows:

•Maximum Valuation ($US/BTC) = ("Medium of Exchange" Valuation + "Store of Value" Valuation) / Quantity of Bitcoins in Circulation

•"Medium of Exchange" Valuation = Average Market Cap for Top 3 Money Transfer Companies + Estimate of Bitcoins to be set aside for E-Commerce

•Estimate of Bitcoins to be set aside for E-Commerce = (Amount of money people would want to set aside for online shopping * % of Online Shopping Done With Bitcoins) / US E-Commerce as % of World E-Commerce

•Amount of money people would want to set aside for online shopping = Total B2C e-commerce sales in the US * US Consumer Velocity of Money for E-Commerce

•US Consumer Velocity of Money = US personal consumption expenditures / Household checking deposits and cash

•"Store of Value" Valuation = Value of Gold Above Ground /5*5/1300 (an adjustment factor to match the Merrill Lynch estimate)

•Value of Gold Above Ground = Estimated Ounces of Gold Above Ground * Gold Price

The data sources are:

•Market capitalizations of Western Union, Moneygram and Euronet come from ycharts.com

•The estimate of total B2C e-commerce sales in the US and estimates of future B2C e-commerce sales growth is provided by statista.com

•US personal consumption expenditures and household checking deposits and cash data comes from research.stlouisfed.org/fred2

•Gold price comes from gold.org

•Estimated Ounces of Gold Above Ground comes from gold.org

The modeling assumptions are:

•US E-Commerce as % of World E-Commerce in the future is 20%

•% of Online Shopping Done With Bitcoins in the future is 10%

•The US consumer velocity of money for e-commerce is assumed to be the same as US consumer velocity of money for regular commerce

•The overall US velocity of money in the future is assumed to be the past 20 year average

•Estimated global gold mine production is assumed to continue at the same rate in the future

•Average Market Cap for Top 3 Money Transfer Companies assumed to continue into the future at prior year 3-year CAGR

•US personal consumption expenditures assumed to continue into the future at prior year 3-year CAGR

•Household checking deposits and cash assumed to continue into the future at prior year 3-year CAGR

•Gold price assumed to be flat into the future

Will Martin’s Black Market Bitcoin Valuation

The calculation methodology is as follows:

•Maximum Valuation ($US/BTC) = ("Medium of Exchange" Valuation + "Store of Value" Valuation) / Quantity of Bitcoins in Circulation

•"Medium of Exchange" Valuation = Average Market Cap for Top 3 Money Transfer Companies + Estimate of Bitcoins to be set aside for E-Commerce + Estimate of Bitcoins to be set aside for Online Black Market Transactions

•Estimate of Bitcoins to be set aside for E-Commerce = (Amount of money people would want to set aside for online shopping * % of Online Shopping Done With Bitcoins) / US E-Commerce as % of World E-Commerce

•Amount of money people would want to set aside for online shopping = Total B2C e-commerce sales in the US * US Consumer Velocity of Money for E-Commerce

•US Consumer Velocity of Money = US personal consumption expenditures / Household checking deposits and cash

•Estimate of Bitcoins to be set aside for Online Black Market Transactions = Total global Online Black Market Sales * Velocity of Money for E-Commerce

•Total global Online Black Market Sales = World GDP * Black Market Sales as % of GDP * Online Sales as a % of Black Market Sales

•"Store of Value" Valuation = Value of Gold Above Ground /5*5/1300 (an adjustment factor to match the Merrill Lynch estimate)

•Value of Gold Above Ground = Estimated Ounces of Gold Above Ground * Gold Price

The data sources are:

•Market capitalizations of Western Union, Moneygram and Euronet come from ycharts.com

•The estimate of total B2C e-commerce sales in the US and estimates of future B2C e-commerce sales growth is provided by statista.com

•US personal consumption expenditures and household checking deposits and cash data comes from research.stlouisfed.org/fred2

•Gold price comes from gold.org

•Estimated Ounces of Gold Above Ground comes from gold.org

•World GDP historic and forecast data comes from the IMF World Economic Outlook

•Black Market Sales as a % of World GDP comes from Elgin et al (2012)

The modeling assumptions are:

•US E-Commerce as % of World E-Commerce in the future is 20%

•% of Online Shopping Done With Bitcoins in the future is 10%

•The US consumer velocity of money for e-commerce is assumed to be the same as US consumer velocity of money for regular commerce

•The overall US velocity of money in the future is assumed to be the past 20 year average

•Estimated global gold mine production is assumed to continue at the same rate in the future

•Average Market Cap for Top 3 Money Transfer Companies assumed to continue into the future at prior year 3-year CAGR

•US personal consumption expenditures assumed to continue into the future at prior year 3-year CAGR

•Household checking deposits and cash assumed to continue into the future at prior year 3-year CAGR

•Gold price assumed to be flat into the future

•Velocity of money online black market sales is assumed to be the same as US consumer velocity of money for regular commerce

•Black Market Sales as % of World GDP are assumed to be flat in the future

•Online Sales as a % of Global Black Market Sales are assumed to be 1% in 2011, growing to 10% in 2020

•Assuming 80% of Online Black Market Market Sales will be conducted in Bitcoin

A Call To Action

My main goal with this book is to help spread awareness of the vast potential of anonymous cryptocurrencies to improve our world. They can help us fight government oppression, reclaim our eroding privacy and act as an alternative to our unsustainable global debt-based, infinite-growth-dependent monetary system. With their limited supplies and high adoption rates, these currencies may also make early investors very wealthy. Priced at just $4.99, I hope you got at least $5 worth of information from this book; if you are unhappy for any reason, simply go to amazon.com/manageyourkindle, select the “actions” button next to the title, and select “return for refund;” I will gladly refund you. If this book helped open your eyes to the potential of anonymous cryptocurrencies to improve our world, I hope you will help me spread the word to other people. The only way these currencies will succeed is if people actively evangelize them. One way to help is by taking a minute to log on to Amazon.com to rate this book (hopefully a 5!). If you’d like to do more, you can share a link to the book with your friends on Facebook and Twitter. Thank you.

Citations

Cover drawing is “Villainc” by J.J., released under the creative commons license (https://en.wikipedia.org/wiki/Villain#mediaviewer/File:Villainc.svg)

This book became a #1 bestseller in all three of its Amazon categories on July 17th, 2014: https://twitter.com/PeakOilProof/status/489989155795914752

[1] http://www.peakoilproof.com/2011/05/dollar-alternatives.html

[2] http://www.voxeu.org/article/shadow-economies-around-world-model-based-estimates

[3] http://www.scientificamerican.com/article.cfm?id=global-bazaar&print=true

[4] http://www.voxeu.org/article/shadow-economies-around-world-model-based-estimates

[5] While the “black market” is technically defined by agencies like the OECD as a subset of the “informal economy,” I use the phrase “black market” interchangeably with “informal economy," as it is a more commonly-known descriptor.

[6] http://www.voxeu.org/article/shadow-economies-around-world-model-based-estimates

[7] http://www.jdapsi.com/Client/articles/coh

[8] http://www.irs.gov/taxtopics/tc420.html

[9] http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Barter-Exchanges

[10] http://www.forbes.com/2010/02/16/irs-high-income-millionaire-audits-personal-finance-pwc-tonkovic.html

[11] https://www.youtube.com/watch?v=7ubJp6rmUYM

[12] http://germanwatch.org/fr/download/7170.pdf

[13] http://www.amazon.com/Eating-Fossil-Fuels-Coming-Agriculture/dp/0865715653

[14] http://climate.envsci.rutgers.edu/pdf/RobockToonSciAmJan2010.pdf

[15] http://www.nti.org/gsn/article/the-pentagons-secret-plans-to-secure-pakistans-nuclear-arsenal/

[16] http://www.vice.com/the-vice-guide-to-travel/bulgarian-dirty-bombs

[17] http://www.foreignpolicy.com/articles/2010/11/16/al_qaedas_nuclear_ambitions

[18] https://secure.wikimedia.org/wikipedia/en/wiki/Denarius

[19] https://secure.wikimedia.org/wikipedia/en/wiki/Executive_Order_6102

[20] https://secure.wikimedia.org/wikipedia/en/wiki/Rationing_in_the_Soviet_Union

[21] https://secure.wikimedia.org/wikipedia/en/wiki/Price_signal

[22] https://secure.wikimedia.org/wikipedia/en/wiki/Liberty_bond

[23] https://secure.wikimedia.org/wikipedia/en/wiki/Inflation_tax

[24] https://secure.wikimedia.org/wikipedia/en/wiki/Pork_barrel

[25] https://secure.wikimedia.org/wikipedia/en/wiki/Iron_triangle_%28US_politics%29

[26] https://secure.wikimedia.org/wikipedia/en/wiki/Fractional-reserve_banking

[27] theweek.com/article/index/215850/silk-road-the-amazoncom-of-illegal-drugs

[28] http://lsvp.com/2013/08/15/about-half-a-percent-of-bitcoin-transactions-are-to-buy-drugs/

[29] www.cnn.com/2013/10/04/world/americas/silk-road-ross-ulbricht/

[30] http://www.wired.com/2013/11/silk-road/

[31] www.forbes.com/sites/andygreenberg/2013/11/06/silk-road-2-0-launches-promising-a-resurrected-black-market-for-the-dark-web/

[32] motherboard.vice.com/blog/utopia-silk-roads-latest-replacement-only-lasted-nine-days

[33] http://www.coindesk.com/darkmarket-alternative-launches-friendlier-title-openbazaar/

[34] http://willmartin.com/the-worlds-first-documented-sale-on-a-decentralized-online-marketplace-my-book/

[35] http://www.un.org/apps/news/story.asp?NewsID=25762

[36] http://www.economist.com/news/international/21602729-traditional-drugs-lose-their-lure-novel-ones-are-filling-gap-market-new

[37] www.pbs.org/newshour/updates/bitcoin-gambling-sites-fly-regulatory-radar/

[38] www.gtech.com/eng/pdf/social/2012report/02_3_The_World_Gaming_Market.pdf

[39] theweek.com/article/index/255982/how-did-americans-manage-to-lose-119-billion-gambling-last-year

[40] www.havocscope.com/tag/illegal-gambling/

[41] gamblitgaming.com/infographic-history-of-the-35-billion-online-gambling-industry/

[42] www.npr.org/blogs/money/2012/07/27/157499893/episode-390-we-set-up-an-offshore-company-in-a-tax-haven

[43] www.nytimes.com/2012/07/29/magazine/my-big-fat-belizean-singaporean-bank-account.html?pagewanted=all&_r=0

[44] http://www.bjs.gov/content/pub/press/vit12pr.cfm

[45] www.ft.com/cms/s/0/d1131630-9005-11e3-8029-00144feab7de.html

[46] http://gulfnews.com/business/economy/global-remittance-flow-grows-10-77-to-514-billion-in-2012-world-bank-1.1172693

[47] http://siteresources.worldbank.org/INTTRADERESEARCH/Resources/544824-1323963330969/8322197-1323963859082/Beck_MartinezPeria.pdf

[48] http://www.reddit.com/r/Bitcoin/comments/208smd/bitcoin_surpasses_western_union_in_daily/

[49] https://www.stlouisfed.org/publications/cb/articles/?id=2039

[50] http://dealbook.nytimes.com/2014/06/15/bank-account-screening-tool-is-scrutinized-as-excessive

[51] http://www.consumerfed.org/pdfs/CFA_2006_Check_Cashing_Study111506.pdf

[52] http://online.wsj.com/news/articles/SB10001424052970204138204576600800330404330

[53] ((1000/1)^(1/2.6)-1)*100= 1325.1026703%

[54] http://www.moneychimp.com/features/market_cagr.htm

[55] https://www.google.com/finance?q=MNST

[56] https://www.google.com/finance?q=PIR

[57] https://blockchain.info/popular-addresses

[58] http://coinmarketcap.com/

[59] https://bitcoin.stackexchange.com/questions/16649/can-someone-explain-to-me-how-coinjoin-works-for-anonymity-in-plain-english-with

[60] http://www.darkcoin.io/downloads/DarkcoinWhitepaper.pdf

[61] http://wiki.darkcoin.eu/wiki/FAQ

[62] http://drk.poolhash.org/darksend.html

[63] http://coinmarketcap.com/

[64] http://www.reddit.com/r/DRKCoin/comments/28vy1z/faq_myths_about_drk_addressed/

[65] http://www.reddit.com/r/DarkNetMarkets/comments/1zz4h0/the_armory_new_currency_accepted_darkcoin/

[66] https://www.darkcoin.io/meetteam.html

[67] www.linkedin.com/pub/evan-duffield/15/455/986

www.linkedin.com/pub/kyle-hagan/7/b15/b49

[68] http://coinmarketcap.com/

[69] http://www.x11coin.org/XCPlatform/XC-Mission-statement.pdf

[70] http://coinmarketcap.com/

[71] http://www.coindesk.com/darkcoin-duel-xc-demise-mcdogecoin/

[72] http://coinmarketcap.com/

[73] http://www.forbes.com/sites/andygreenberg/2013/10/31/darkwallet-aims-to-be-the-anarchists-bitcoin-app-of-choice/

[74] http://www.bitcoin2013.com/bitcoin-2013-panelists.html

[75] http://zerocash-project.org/index

[76] http://zerocash-project.org/index

[77] http://wiki.nxtcrypto.org/wiki/NxtCash

[78] https://mobile.twitter.com/secparam/status/468784402558771200

[79] http://coinmarketcap.com/

[80] https://anoncoin.net/index.php/the-coin

[81] http://coinmarketcap.com/

[82] https://bitcointalk.org/index.php?topic=661820.0

[83] http://coinmarketcap.com/crypt_30.html

[84] http://cryptco.org/Cryptcoin-CryptCast-Anonymous-Whitepaper.pdf

[85] http://www.cryptocoinsnews.com/news/maidsafe-embroiled-safecoin-presale-mastercoin-pump-dump/2014/04/22

[86] http://metaquestions.me/2014/04/12/safecoin-why-its-safe-and-what-it-means-for-us-all/

[87] http://coinmarketcap.com/

[88] http://coinmarketcap.com/

[89] http://www.cryptoarticles.com/crypto-news/2014/5/27/libertycoins-anonymous-feature-libertysend-completed-liberty-express-platform-announced

[90] http://coinmarketcap.com/

[91] http://www.vericoin.info/verisend.html

[92] http://www.coindesk.com/vericoin-altcoin-spend-wherever-bitcoin-accepted/

[93] http://coinmarketcap.com/

[94] http://www.blackcoin.co/news/blackhalo-and-bithalo-are-now-in-open-beta

[95] http://coinmarketcap.com/

[96] https://anon.pink/whitepaper.pdf

[97] http://coinmarketcap.com/

[98] https://bitcointalk.org/index.php?topic=625693.0

[99] http://coinmarketcap.com/

[100] http://www.vootcoin.com/

[101] https://cryptonote.org/inside.php#untraceable-payments

[102] https://blockchain.info/

[103] http://monerochain.info

[104] http://www.numion.com/calculators/time.html

[105] http://coinmarketcap.com/

[106] https://cryptonote.org/coins.php

[107] https://geti2p.net/en/blog/post/2014/05/25/Monero-partnership

[108] http://coinmarketcap.com/

[109] http://cpucoinlist.com/cryptocurrencies/bytecoin-bcn/

[110] http://coinmarketcap.com/

[111] http://coinmarketcap.com/

[112] http://coinmarketcap.com/

[113] http://coinmarketcap.com/

[114] http://altcoinhunters.com/2014/04/honeypenny/

[115] https://forum.cryptonote.org/viewtopic.php?f=6&t=201

[116] http://coinmarketcap.com/

[117] http://coinmarketcap.com/

[118] www.thewire.com/technology/2013/12/nsa-intercepts-laptops-purchased-online-install-malware/356548/

[119] http://www.lawfareblog.com/2014/06/the-strange-demise-of-truecrypt-and-what-it-says-about-cybersecurity/

[120] www.tombom.co.uk/extreme_rfid.pdf

[121] https://www.eff.org/deeplinks/2012/11/tutorial-how-create-anonymous-email-accounts

[122] http://www.wired.com/2014/06/be-anonymous-online/

[123] http://www.coindesk.com/localbitcoins-users-criminal-charges-florida/

[124] http://gigaom.com/2013/11/07/first-bitcoin-atm-gets-348-transactions-in-first-8-days-now-comes-the-hard-part/

[125] http://hongwrong.com/bitcoin-atm-privacy/

[126] http://www.bitaccess.co/consumers/

[127] http://thegpexchange.com/western-union-a-complete-guide/

[128] http://online.wsj.com/news/article_email/SB10001424052702303801304579410010379087576

[129] http://www.wired.com/2012/03/ff_nsadatacenter/all/

[130] https://markets.blockchain.info/

[131] http://coinmarketcap.com/

[132] http://theblogchain.com/trading/mtgox-is-mtvesuvius-the-full-story/

[133] http://www.zerohedge.com/news/2014-02-07/bitcoin-crashes-25-mtgox-halts-withdrawals

[134] http://faculty.chicagobooth.edu/Richard.Thaler/research/pdf/The%20Nominal%20Share%20Price%20Puzzle.pdf

[135] http://www.mattwhitlock.com/Bitcoin%20Inflation.pdf

[136] https://bitcointalk.org/index.php?topic=227395.0

[137] http://coinmarketcap.com/trc_180.html

[138] https://en.bitcoin.it/wiki/Deflationary_spiral

[139] http://www.economist.com/news/finance-and-economics/21599053-chronic-deflation-may-keep-bitcoin-displacing-its-fiat-rivals-money

[140] http://hbr.org/2012/05/global-business-speaks-english/ar/1