What Are Privacy Coins?

By Anders Bylund – Updated Feb 25, 2025 at 10:41 PM

Key Points

Privacy coins use advanced security to anonymize transactions and wallet identities.
Monero and Zcash are popular privacy coins, each utilizing unique cryptographic strategies.
Despite their security, privacy coins face legal issues and restrictions on major trading platforms.

Some cryptocurrencies are designed with privacy protection in mind. The digital transaction ledgers are still published on the open internet and available to anyone, but a privacy coin can shield the identity and balance of each wallet on the blockchain.

What are privacy coins?

Sometimes a cryptocurrency user wants qualities you’d usually find in a standard currency like the U.S. dollar. For example, cash transactions are hard to track even if you have the serial number of each bill that was used. In situations where this anonymity is desirable or even required, you could achieve a similar effect by using a privacy coin.

A green Privacy button on a keyboard. — Source: Getty images

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About the Author

Anders Bylund is a contributing Motley Fool media and technology analyst covering semiconductors, cloud computing, internet infrastructure, quantum computing, and streaming media. Previously, Anders was a systems administrator for Nielsen Technology and CSX, gaining hands-on experience with enterprise-class systems. He was also a freelance writer for Ars Technica, TIME, USA Today, CNN, WIRED, and AOL's Daily Finance. He holds a bachelor’s degree in English and a master’s degree in library and information sciences from Florida State University. He believes in coyotes and time as an abstract.

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Anders Bylund has positions in Bitcoin, Ethereum, and Polkadot. The Motley Fool has positions in and recommends Bitcoin and Ethereum. The Motley Fool recommends Monero. The Motley Fool has a disclosure policy.

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The hard-to-track quality makes privacy coins useful in certain cases:

Maybe you run a business and want to manage cryptocurrency payments to and from your suppliers. A Bitcoin wallet would let suppliers see how much money you have in the accounts, which could give them an edge in negotiating new contract rates.
Let’s say you want to trace the ownership lineage of your cryptocurrencies back through history, and you find out that some of your Ethereum was previously used in a shady or criminal activity. Could that tainted cryptocurrency land you in hot water if a criminal investigation leads back to your wallet? With untraceable privacy coins, this risk doesn’t exist.
When your wallet’s transaction history is publicly available, the day might come when e-commerce vendors analyze the wallets of potential customers and adjust their prices to your proven spending habits. Privacy coins dodge this issue by keeping your data secret.

The digital ledger at the heart of any cryptocurrency creates risks that don’t exist for payments made in physical cash. Any dollar bill is just as good as any other dollar bill, and it doesn’t really matter who owned them. This interchangeable quality is known as fungibility, and privacy coins go out of their way to achieve a similar effect.

The same qualities also give privacy coins the ability to perform criminal activities such as money laundering and payment for illegal goods or services. This potential for illicit use has made privacy crypto coins illegal in many jurisdictions.

That’s why leading cryptocurrency trading platforms such as Coinbase (COIN -2.22%) and Binance won’t let you buy or sell some of these privacy-focused digital coins right now. Future regulations might clear up the market, but they could also lock it down even tighter.

How privacy coins work

Each privacy coin uses a different strategy to anonymize its transaction data and wallet balances. Generally speaking, these strategies involve temporary addresses and splitting up each transaction into a large number of smaller ones. Crucial information about each whole or partial transaction can also be stored in encrypted form instead of a publicly readable ledger.

Monero transactions are signed in a complex system known as a ring signature. In essence, every unique transaction comes with the digital signatures of many different signers, only one of whom actually performed the digital transfer. Figuring out which signature belongs to what transaction is too difficult for the best cracking methods known today.

A similar system also obscures the amount of each transaction by splitting it up into smaller shards, which then are bundled together with shards from different transactions. This feature is known as RingCT, or ring confidential transactions.

Monero also creates temporary addresses for every transaction, which are protected by two different private cryptographic keys. Only the holder of both private keys can see the final target address of a Monero transaction.

Together, these features make it nearly impossible to track assets flowing through the Monero system. Yet every move is written in stone just as securely as an Ethereum or Bitcoin transaction. Monero’s privacy features are mandatory for every transaction.

2. Zcash

The Zcash (ZEC +25.05%) privacy coin started as a direct clone of Bitcoin, adding privacy-shielding features over time. Its Equihash mining algorithm runs much faster when it has lots of high-speed memory available, which makes it costly to develop and deploy specialized microchips for the purpose of mining Zcash.

Zcash’s privacy-boosting features rely on a concept called zero-knowledge cryptography. A multi-step process of mathematics and high-quality randomness generates a transaction key called a zk-SNARK, which can be used to prove that a transaction took place without revealing any additional information about it.

Unlike Monero, this privacy enhancement isn’t always active. Zcash owners can choose to send tokens in a public transaction that looks a lot like an ordinary Bitcoin transfer, or in a “shielded” transaction using zk-SNARK protection.

The shielded transactions are as secure as Monero’s always-on privacy guards.

What Are Privacy Coins?

Key Points

What are privacy coins?

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9 Blockchain Stocks to Invest In

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About the Author

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Privacy coins explained

How privacy coins work

The three most private cryptos

1. Monero

2. Zcash

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