Cryptocurrency transactions on the Bitcoin blockchain are pseudo-anonymous in nature. The "public ledger" structure of some blockchain technologies means that transactions are not 100% private.

To address this, some developers have created privacy coins. But what exactly is a privacy coin, how does it differ from a regular cryptocurrency, and why do people use it? Let's find out.

Privacy Coins as Cryptocurrency

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A privacy coin is a type of cryptocurrency that offers enhanced privacy features to completely conceal the identity, transaction history, and even wallet balance of a crypto holder.

Why the added layers of security? This harks back to a collective commitment towards an individual’s right to privacy. A group of advocates known as cypherpunks strongly believe that it is a fundamental human right to choose what to share and not share online. And in the digital age, this belief is more important to them than ever.

Private cryptocurrencies utilize a wide range of cryptographic tools to strengthen encryption, such as zero-knowledge proofs and stealth addresses.

What Are Privacy Coins Used For?

Just like regular cryptos, privacy coins are used to perform transactions. But extra security measures mean that both the sender and receiver do not have to worry about third parties digging up details about any transactions made.

Pros and Cons of Private Cryptocurrencies

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Like other cryptos, privacy coins have their benefits and drawbacks.

Privacy coins are a good alternative for any crypto holder seeking to conceal their identity in the crypto space. Many privacy coin holders believe that one’s purchase is a private matter and should be treated as such.

However, privacy coins' extreme level of security has led to them being used for illicit activities. Privacy coins have seen increased use on the dark web and have become a popular choice for money laundering and criminal transactions.

Related: Why You Must Avoid the Dark Web

As a result, privacy coins face significant problems with law enforcement in many countries all around the world. In the US, the Internal Revenue Service (IRS) is developing a way to de-anonymize and trace privacy coins used to commit tax fraud.

The UK has yet to pass laws banning privacy coins. However, lawmakers look to the Joint Money Laundering Steering Group (JMLSG) for guidance on regulating cryptocurrency trading in the country, including privacy coins. In Japan and South Korea, privacy coins are banned.

Some major crypto exchange platforms, including Bittrex and CoinCheck, have also delisted privacy coins.

The Best Privacy Coins for Private Cryptocurrency Transactions

privacy coins Monero, Dash, and Zcoin
Image Credit: Coin Central/Coin Central

There are not a lot of privacy coins in the market. Combined, privacy coins are worth about $10 to $12 billion, representing less than 1% of the total crypto market cap.

Here are some of the most well-received privacy coins in the cryptocurrency market.

  • Monero: Founded in 2014, Monero is perhaps the most well-known privacy coin in the industry. Monero runs on the CryptoNote protocol, a system that obscures the blockchain’s public ledger.
  • Dash: Also founded in 2014, Dash is a Bitcoin fork that adds multiple additional private features to the project.
  • Verge: Verge is known for utilizing TOR and the Invisible Internet Project (I2P) to ensure that the IP addresses of its senders and recipients are completely untraceable.
  • Zcash: Zcash is also forked from Bitcoin but adds more anonymity. It utilizes zero-knowledge proofs, which gives senders the option to hide their transactions and recipients the option to decrypt them.

Privacy as Currency

Despite a controversial status in some countries, the popularity of private cryptocurrencies shows no sign of diminishing. Governments worldwide are looking to limit the trade of regular cryptos, which is increasing privacy coin usage.

For anyone who wants to keep their crypto activity private, privacy coins are a suitable option. However, like any other investment, privacy coins have considerable risks—so always make sure that you do sufficient research before betting your money on them.