By late 2016, Monero (XMR 2.72%) was the fifth-largest cryptocurrency in the world, with a market cap of $133 million, while Bitcoin, the largest crypto, was worth $14.4 billion.
Today Bitcoin has soared over 5,000% to $763 billion, while Monero grew a little over 3,200% to $4.2 billion in the same time frame -- falling to No. 33 on the crypto leaderboard. Despite posting decent growth over the last six years, Monero is no longer a leading cryptocurrency. Is it poised for a rebound or doomed to continue underperforming the top blockchains? Let's dig deeper.
Image source: Getty Images.
What is Monero?
Launched in 2014, Monero is a blockchain network designed to maximize privacy and anonymity. Most transactions using other cryptocurrencies can be traced to a unique digital address (code that identifies a sender or receiver of a cryptocurrency), giving clues about its owner's online activity and identity. Monero solves this problem by hiding this data and other transaction details like the number of coins sent or received.
Unlike Bitcoin, where every coin has a serial number, every XMR (the native token of Monero) is fungible, which means they are completely identical and interchangeable with each other. The network also gives every transaction plausible deniability through ring signatures, an encryption technique that creates multiple decoys for actions on the network.
It also uses stealth addresses, which are one-time crypto addresses that are deleted after each transaction.
Despite using the arguably outdated proof-of-work (PoW) consensus mechanism, where miners update the blockchain by solving computational puzzles, Monero has some pretty impressive specs. The network can handle an estimated 1,000 transactions per second, compared to Bitcoin's five and Ethereum's 15. This speed makes it optimized in its use case as an anonymous way to store and transmit value online. However, unlike some newer blockchains, Monero doesn't support decentralized applications, which are self-executing programs that use smart contracts to offer services on the blockchain.
Regulatory risk
Privacy coins like Monero have many legitimate use cases, but their link to cybercrime is a hindrance to their mainstream adoption. According to CNBC, Monero is increasingly used for payment in ransomware attacks (to be fair, Bitcoin is also used for this). This led to it being less liquid than other cryptocurrencies because some exchanges have chosen not to support it for fear of attracting unwanted regulatory attention.
Those fears are not unjustified. Forbes magazine reports that in September 2021, the IRS even offered to pay up to $625,000 to anyone who can help provide support (likely through hacking) on investigations involving Monero and other privacy-focused coins.
Is Monero a buy?
On paper, Monero is an excellent cryptocurrency. It has a well-defined, unique use case, impressive technical specs, and an early-mover advantage, which should theoretically give it some advantages in terms of name recognition and adoption. But despite its perks, the asset has failed to maintain the dominant position it once held in the industry.
Regulatory attention on privacy coins will be a long-term headwind. And while Monero deserves a spot in a diversified crypto portfolio, this challenge makes it unlikely to generate sustained market-beating growth.
