What if someone made Bitcoin (BTC 0.13%), but with some privacy features? In a nutshell, that's what Zcash (ZEC 2.50%) is supposed to be, and so it's only natural for investors to wonder if it might be the next Bitcoin, or potentially even supplant the original cryptocurrency.
Today, Zcash has a $6.8 billion market cap, which means that if it does become the next Bitcoin someday, those who invest significantly in it now will likely see incredible wealth. Given the stakes, it's worth taking a look at whether this narrative can actually play out, so let's dive in and investigate.
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The similarities are significant, and the differences are beneficial
Exactly as with Bitcoin, Zcash is a proof-of-work (PoW) cryptocurrency with a maximum supply of 21 million ZEC coins that can ever exist, and it experiences a halving about every four years. So right off the bat, investors should take careful note that the supply dynamics that have made Bitcoin such a great long-term investment -- it's up about 160% during the past five years alone, and vastly more than that over the past 10 years -- apply to Zcash, too. And, importantly, there's a big tweak to Zcash that Bitcoin doesn't have, which changes its demand dynamics to be even more appealing to purchase and hold than Bitcoin is.
By design, Bitcoin is a public blockchain in which every transaction is broadcast and verifiable by anyone with an internet connection. For the purpose of this conversation, it's helpful to explicitly think of such public blockchains as open databases to which anyone can write new data for a fee, and which anyone can read for free. But, neither erasing nor modifying existing data are permitted, so anything committed to the public blockchain will live there for eternity, barring extremely rare and exceptional circumstances.
CRYPTO: BTC
Key Data Points
And in a sense, that's the impetus behind Zcash and everything else in the privacy coin category.
Consider for a moment that one might dislike the idea that every single one of their financial transactions on a blockchain will be visible and knowable to everyone else forever. Hence Zcash's primary difference from Bitcoin, which is the capability for its transactions to be protected from prying eyes so that nobody except for the transactors can tell who sent money to whom, as well as other metadata. To accomplish that, it uses a relatively new type of cryptographic proofs called zk-SNARKs, which weren't yet invented back when Bitcoin was launched.
Zcash also diverges from Bitcoin in how its mining rewards get distributed, including funding structures intended to support ongoing development. About 20% of each mined block of Zcash is distributed to a pair of funds, both of which are dedicated to developing the chain and encouraging community-led initiatives. This makes mining Zcash tokens somewhat less lucrative for miners than mining Bitcoins, but it also helps to ensure that the chain will continue to get upgrades and have a vibrant ecosystem of useful software, like crypto wallets capable of holding Zcash and making transactions without compromising its privacy features.
CRYPTO: ZEC
Key Data Points
Still, it's worth mentioning that Bitcoin has all of the engaged developers it could ever need without the same feature, so while Zcash's self-funding ecosystem mechanism is certainly a big plus, it isn't necessarily a must-have.
But can it really ever beat Bitcoin?
If Zcash were to merely match Bitcoin's current market cap, its price would need to rise by a colossal amount, as its cap is $6.8 billion, whereas Bitcoin's is $1.9 trillion. In other words, it would need to become one of the most valuable assets in the world, and Bitcoin would need to mostly stand still (or decline) while it happened. To say that it would take at least a handful of years is an understatement, and it definitely isn't something you should bet the farm on.
On the other hand, Bitcoin's stunning rise from a financial novelty to a major asset is something that few were able to predict in advance. At least so far, Zcash's development process has tended to emphasize fixing, correcting, or avoiding the technical and governance problems that Bitcoin has or had in the past -- which, to be clear, did not stop Bitcoin from becoming what it is today, even if those issues slowed its ascent a bit.
I don't know with certainty whether Zcash is going to actually become the next Bitcoin, but I'm confident that it can and will become much larger during the coming years. I'm also confident that Zcash becoming the next Bitcoin is indeed a real possibility, and that's why I own it.
