Bitcoin falls out of favor

On May 15th, according to The Wall Street Journal, as Bitcoin prices continue to languish and gradually become mainstream, some veteran cryptocurrency enthusiasts are beginning to feel disappointed with Bitcoin because it no longer offers the returns they expected or the privacy protections they valued. Others are indifferent to the sudden hype from politicians and celebrities endorsing Bitcoin.

Recently, a large number of hardcore Bitcoin supporters and early evangelists are shifting their support to another digital token: Zcash.

Tyler Winklevoss and Cameron Winklevoss are also major investors in this so-called “privacy coin,” Zcash, which allows users to hide transaction details.

Zcash’s emphasis on anonymity has reminded some of the early days of cryptocurrency, when privacy was championed as a passport to personal freedom.

“It feels like going back to the Bitcoin era around 2013,” said Barry Silbert, founder of Digital Currency Group (DCG) and Grayscale Investments. Grayscale was the first to establish a publicly traded Bitcoin fund.

Sources familiar with the matter say that this year, DCG has made Zcash one of its largest holdings. In November, Grayscale told regulators that it plans to convert its Zcash trust into an exchange-traded fund (ETF), making it easier for ordinary investors to participate. This move has injected strong momentum into the token’s soaring rally.

Over the past month, Zcash has risen about 50%, and over the past year, it has surged 1,140%. In comparison, Bitcoin has only increased 8% in the past month and fallen 24% over the past year.

Another factor driving Zcash’s surge is that concerns about U.S. regulators cracking down on its privacy features (fearing it could be used for illegal purposes) are now easing. Earlier this year, the U.S. Securities and Exchange Commission (SEC) announced it had ended its investigation into the token.

Currently, Zcash’s market cap is about $8.9 billion, still a drop in the bucket compared to Bitcoin’s size. Additionally, small cryptocurrencies have historically been prone to rapid rises followed by crashes, which investors should be cautious of.

But this has not stopped some of the most prominent Bitcoin supporters from rushing in.

In November, the Winklevoss brothers announced they had invested $50 million to help establish Cypherpunk Technologies, a digital asset company that will hold Zcash as a reserve asset.

“This is not some flashy new project that appears out of nowhere with a bunch of buzzwords and marketing gimmicks,” Cameron Winklevoss said.

Although Zcash is now the “hot new darling” in the crypto space, it actually has a ten-year history.

The token was founded in 2016 by a group of scientists and engineers, including experts from MIT and Johns Hopkins University. It is essentially a fork of Bitcoin, but with the original goal of fixing the privacy flaws that its founders saw in Bitcoin.

Like Bitcoin, it allows users to send or receive funds on a public ledger. The key difference is that Zcash offers users the option to use “shielded addresses,” which leverage cryptography to hide sensitive data such as sender, receiver, and transaction amount.

(Zcash’s name derives from its use of “zero-knowledge proof” technology, which allows transaction verification without revealing other details.)

Users can generate “view keys” to share transaction details with regulators or auditors — but this is entirely at their discretion.

This feature gives the token enormous commercial potential. For example, companies could use it to hide sensitive information like payroll and supplier relationships.

Supporters say it can also bypass government financial surveillance — a vision that traces back to the origins of cryptocurrency. “Zcash is exactly what Bitcoin should have been, and the original design of Bitcoin,” said Tushar Jain, co-founder of Multicoin Capital, which has recently accumulated a large position in Zcash.

While Bitcoin users don’t need to use real names on the blockchain, the existence of a public ledger makes the token increasingly traceable. Many blockchain analysis firms are assisting law enforcement in cracking these “anonymous” transactions and tracking illegal activities.

But for some, the extra layer of privacy that Zcash offers is a red flag.

Authorities worry that malicious actors might use such privacy coins to evade sanctions and commit crimes. Some other countries’ regulators have already banned or restricted trading of privacy coins on licensed exchanges.

Blockchain analysts note that so far, malicious actors still largely prefer Bitcoin and stablecoins because they are easier to transact and have much larger markets and liquidity than privacy coins.

Despite the recent frenzy around Zcash, the token lacks a feature that helped Bitcoin establish its mythic status: a mysterious founder.

Unlike Satoshi Nakamoto, one of Zcash’s founders has remained active in the public eye.

Zuko Wilcox-O’Hearn is an American computer security expert and cryptographer who previously served as CEO of Electric Coin Co., the company founded by Zcash’s co-founders to develop the blockchain technology behind the token.

Since stepping down from that role at the end of 2023, Wilcox-O’Hearn has served as Chief Product Officer at Shielded Labs, an organization dedicated to further developing Zcash.

Last December, he also joined Winklevoss brothers’ Cypherpunk Technologies as a strategic advisor. To date, this company, which aims to accumulate Zcash, has stored over 300k tokens.

So far this month, Cypherpunk’s stock price has risen 35%, with an annual increase of about 3.5%. However, as Bitcoin prices continue to fluctuate, companies holding digital tokens have recently lost some of their former luster.