Throughout history, the stock market has been the greatest creator of long-term wealth. But in 2017, the stock market, which has historically returned about 7% per year, inclusive of dividend reinvestment and adjusted for inflation, took a big back seat to the cryptocurrency market.
Just how big of a back seat? U.S. stock indexes were generally lauded for roughly 20% gains in 2017, which roughly tripled their historic average. Meanwhile, the aggregate cryptocurrency market cap increased in value by more than 3,300% from Dec. 31, 2016, to Dec. 31, 2017, according to CoinMarketCap.com.
Bitcoin, the world's largest virtual currency by market cap, and the digital currency most accepted by merchants worldwide, is often credited with putting the cryptocurrency rally on its back last year. Having begun the year at just $967 per coin, bitcoin wound up ending the year at $14,156 per coin after nearly hitting $20,000 in December.
However, the rally in cryptocurrencies last year was about way more than just bitcoin. If anything, it was about everything not named bitcoin. The aggregate market value of every investable cryptocurrency, excluding bitcoin, catapulted from $2.24 billion as of Dec. 31, 2016, to $374 billion by the end of the year. In other words, the search for the next bitcoin is what really drove cryptocurrency gains in 2017.
Privacy coins dazzled in 2017
Among the trends that really stood out and pushed virtual coins higher was the late-year excitement over privacy coins. All cryptocurrency blockchain networks are designed to be secure and provide some degree of privacy. After all, no bank account or Social Security number is required to purchase virtual currencies, which is one of their primary selling points. But, as we've learned recently, cryptocurrency transactions aren't nearly as anonymous as once believed.
In late November, the Internal Revenue Service (IRS) won a court case against cryptocurrency exchange Coinbase that required Coinbase to turn over information on 14,355 users. These users had exchanged at least $20,000 worth of bitcoin between 2013 and 2015. Though the IRS's purpose for this case was to seek out possible tax evaders (only 800 to 900 taxpayers a year reported bitcoin-based capital gains between 2013 and 2015), the bigger picture is that these blockchain-based transactions could be traced back to individual people. In short, the bitcoin blockchain wasn't so anonymous after all.
Thus entered privacy coins, stage right.
Privacy coins take the expected anonymity and privacy associated with blockchain technology -- blockchain being the digital, distributed, and decentralized ledger that logs all transactions -- and turns it up a bunch to provide obscurity to the sender, and possibly receiver, of funds.
Despite big-name appeal, Monero ate PIVX's dust last year
One of the larger players in the privacy coin arena, and a big beneficiary with a 2,433% gain in 2017, is Monero and its coin, XMR. Whereas most cryptocurrencies use an unchanging signature when verifying transactions, Monero's CryptoNote protocol uses ring signatures that act like a joint bank account with multiple signers. The trick is that these ring signatures obscure the actual "signer," or in this instance, the sender of XMR coins. Each transaction on Monero's network creates a one-time spend key, known as a stealth address, which ensures that only the recipient of a payment can detect and spend those funds.
But despite its big-name appeal and open-source CryptoNote protocol, it's not Monero that's been stealing the show among privacy coins of late -- it's PIVX. The lesser-known PIVX coin surged by nearly 142,000% in 2017, meaning it circled around Monero's 2,433% gain some 57 times!
Let's take a closer look at what's made PIVX such a hot commodity among cryptocurrency investors of late.
Here's what PIVX brings to the table
Similar to Monero, PIVX offers its own twist on protocols designed to anonymize transactions. It utilizes a custom version of Zerocoin protocols to obscure the addresses associated with coins, and unlike other privacy coin players like Zcash and Dash, promises complete anonymity. There's no way a blockchain analysis can reveal the sender or receive of funds.
According to CoinCentral.com, in order to spend PIVX coins anonymously, a user would need to convert standard PIVX tokens into zPIV tokens, which can then be anonymously sent to any address. Since PIVX operates a proof-of-stake model (one where coin-holders play a role in transaction verification), and block times are a mere 60 seconds, transactions on the PIVX blockchain are expected to be fast and relatively inexpensive. Usually added privacy comes with a higher transaction cost, but PIVX is working on ways to provide privacy and anonymity as a basic right for a cheap cost.
What's more, PIVX is aiming high to replace cash and traditional plastic in becoming a top peer-to-peer and goods- or service-based currency. It's developed Android and iOS wallets equipped with unique security measures that'll allow consumers to treat their wallet not only as a means to store PIVX coins, but to act as a payment processor when purchasing goods and services.
Interestingly enough, PIVX also acts a lot like a traditional currency in that its maximum number of coins isn't fixed. Each year, 2.6 million PIVX coins are minted, representing inflation of around 4%. Consistently minting new coins via the proof-of-stake model discourages hoarding and encourages the spending of these coins. Further, since these coins primarily wind up in the hands of stakeholder or masternodes (users who hold coins as collateral), it's essentially offsetting the effects of inflation by spreading the coins among existing stakeholders.
Keep this in mind
Of course, the big question is whether PIVX can continue to outperform. To that end, I'm not so certain.
You see, PIVX does bring a lot of custom protocols to the table, and unique features that can only be found on its privacy network. However, there are more than a half-dozen other privacy coins competing in the same space, and they, too, offer unique features that should help them stand out.
Additionally, as the cryptocurrency market has grown, so has the potential for increased regulation from governments around the world. Around a half-dozen countries have already banned cryptocurrencies, and, just as worrisome, some big businesses have banded together to create their own virtual coins and blockchain technology.
Also, the barrier to entry in the cryptocurrency arena is actually quite low, which should worry current investors. A possible better coin or blockchain could emerge from out of nowhere at any moment.
While I do believe PIVX is worth monitoring, I remain skeptical of the parabolic move in these virtual coins and am fully expecting a sharp correction at some point.