Zcash is the most anticipated new digital currency of 2016. Zcash aims to create a form of electronic money that is truly a bearer instrument.
One impediment to Bitcoin’s use as electronic cash is that all transactions are viewable on the public blockchain. Bitcoin’s fungibility has become an issue as a result. Some people and businesses (mainly exchanges) will not accept Bitcoin if certain addresses touched or will touch those coins in the past or future. Transaction censorship goes against the core of values of Bitcoin.
Zcash is the latest coin that attempts to create a digital currency where no knowledge of the inputs or outputs of the cryptographic signature are require for verification. This is called a Zero-Knowledge Proof. DASH and Monero are two other digital currencies that attempt to solve the same problem using different cryptographic methods.
The hype surrounding Zcash is deafening. The Zcash development team is held in high regard. They have secured investment from notable Bitcoin venture capital firms such as Pantera, Fenbushi, and The Digital Currency Group. Bitcoin luminaries such as Roger Ver, Erik Voorhees, Barry Silbert, and Li Xiaolai have invested their personal capital. Conformational bias is important in evaluating why investors choose one project over another. If the leading figures of the Bitcoin industry are investing, it must be good, right?
Unfortunately Zcash is not holding an Initial Coin Offering (ICO) to distribute ZEC amongst investors. ZEC is the three character currency code for Zcash. ZEC will be distributed through mining rewards just like Bitcoin. Unlike Bitcoin that was an unknown and unproven concept when it launched, the genesis block of ZEC is highly anticipated. The short supply of ZEC paired against ravenous demand, has and will lead to a price spike.
A ZEC block is produced every 2.5 minutes and 12.5 ZEC are awarded to the miner who creates that block. Bitcoin currently produces blocks every 10 minutes, and the block reward is 12.5 BTC. The Zcash team opted for a “slow start” to the mining process. For the first 20,000 blocks (approximately 34 days), only 125,000 ZEC will be created vs. an expected 250,000 ZEC. That leads to an average 6.25 ZEC created per block.
On December 1, 2016, the block reward will revert to 12.5 ZEC per block. By January 1, 2017, the total supply will stand at approximately 348,200 ZEC.
The Zcash team took a total of $3 million worth of outside investment. In order to reward initial investors and pay for operational expenses, during the first 4 years 20% of all ZEC produced will go to the Zcash team and initial investors. The effective supply by January 1, 2017 will be 278,560 ZEC. I will use this as the total supply for the price predictions I will make.
In order to provide price discovery on the future value of ZEC, BitMEX launched the first and only trading product on the ZEC/BTC exchange rate. The ZECZ16 futures contract expires on December 30, 2016 12:00 UTC based on that day’s exchange rate for immediate delivery.
ZECZ16 allows traders to go long or short ZEC with up to 2x leverage. The contract’s listing price on September 15, 2016 was 0.024790 BTC, and now trades at 0.195 BTC, a gain of almost 700%. During that period, 8,590 ZEC (1,675 BTC, $1.08 million) were traded.
The unique feature of ZECZ16 is that traders do not need to own ZEC to trade this futures contract. Using only Bitcoin, any trader can buy and sell ZEC using leverage. This is very important because it will be very difficult to buy, and and almost impossible to short physical ZEC due to the restricted supply. Many miners will not immediately sell the ZEC they produce in hopes of rapid price appreciation. That reduces the amount of ZEC publically available for sale.
The BitMEX ZECZ16 futures contract represents one of the easiest and most liquid ways for any investor to gain exposure to ZEC.
If ZEC is a superior coin to DASH and Monero, then a portion of the funds invested in those two coins will shift to ZEC. The market capitalisation of DASH plus Monero is $154 million. Bitcoin’s market capitalisation is $10.31 billion. DASH + Monero’s market capitalisation is 1.50% of Bitcoin’s. The below table describes what the ZEC/USD price could be on January 1, 2017 depending on what percentage of DASH + XMR funds move into ZEC.
|% of DASH + Monero||ZEC/USD||ZECZ16||% Difference from Current Price|
Even a relatively small amount of money that chases the small supply of ZEC will lead to a price bubble. It is not inconceivable that ZEC touches price parity with Bitcoin in the near term. These economics are not lost on traders, and that is why the ZECZ16 contract is up over 700% since it’s launch in mid-September.
On Friday October 28, 2016, the genesis block will launch. Expect a frenzied scramble for any and all ZEC that becomes publically available for sale.