Monero (XMR) is the best-in-class privacy coin and continues to gain adoption in real-world transactions.

Monero’s relative anonymity makes it ideal for transactions where privacy is required. Recently though, it’s come to the attention of XMR users that this anonymity comes with hidden costs.

According to the Monero community, exchanges are using Monero’s anonymity to conceal their trading of ‘paper contracts’.

A thread in r/cryptocurrency summarizes the issue.

In short, exchanges are accused of selling Monero they don’t have, which suppresses price.

On April 18th, Monero users coordinated to withdraw their XMR from exchanges to create a bank run, forcing exchanges to buy XMR on the market, increasing its price.

This financial sleight of hand happens with cash, too. It’s called fractional reserve banking. Banks are permitted by the Federal Reserve to lend 5 to 10 times more than they hold in cash, thus creating money out of thin air – inflation.

If exchanges are doing the same thing with XMR, inflation doesn’t occur because these paper contracts aren’t circulating in the XMR economy, but speculation is not being priced into the coin.

Hidden benefits of rehypothecation

Caitlin Long warned of this phenomenon as a threat to Bitcoin in 2018, calling it “rehypothecation.”

In #TradFi, rehypothecation is to the reuse of the same underlying collateral in multiple financial contracts.

In the private sector, rehypothecation is illegal, as it can leave its beneficiaries on the hook for more than they’re able to pay.

Proponents in all sectors argue that done carefully, it enables liquidity.

This is ostensibly also the accused exchanges’ argument.

Accusations of rehypothecation may just be a convenient explanation for Monero (XMR)’s stagnant price, but it wouldn’t be the first time exchanges acted unethically to make a buck.

Most coins get their price primarily from speculation, and rehypothecation would decimate many of them.

Monero (XMR), on the other hand, is used primarily for real-world purchases. Because of this, it actually stands to benefit from rehypothecation.

MV = PQ

The Equation of Exchange, MV = PQ is the standard way to value a currency. In short, it says a currency is as valuable as the things it’s used to pay for.

We use it to find cryptocurrency price floors given a set of assumptions.

To use Monero as an example, the price of all circulating XMR must be at least enough to facilitate commerce.

If the price isn’t high enough to meet demand for payments with it, XMR will be bought – and importantly, withdrawn and used to buy things.

Because they’re not circulating, paper contracts don’t affect XMR’s price floor – given Monero’s use profile, it’s unlikely much is sent within exchanges as payment.

“Printing” contracts, though, still suppresses price as speculation is absorbed.

Takeaways

#1) Rehypothecation of XMR has mixed implications.

On the one hand, users miss out on speculative swings due to price suppression.

On the other, XMR gains price stability, arguably Monero’s greatest obstacle in the way of adoption.

#2) Monerun is unlikely to have lasting effects.

5/2/22 editor’s note: XMR’s price is down ~25% since recent highs on 4/18 during Monerun.

Exchanges lose no face by simply refusing withdrawals.

5/2/22 editor’s note 2: Binance withdrawals were suspended on 4/17, ahead of Monerun.

Furthermore, nothing stops exchanges from continuing to rehypothecate XMR.

#3) XMR has major upside.

If the XMR price was purely speculative, rehypothecation would be cause for concern.

But it’s not.

Monero best fits the main use case of cryptocurrencies – private, uncensorable payments.

Regardless of whether Monerun sustainably raises price, XMR has 100x growth ahead of it.

It won’t be long before the world realizes the importance of financial privacy.

For more articles on these valuation methods, read these articles and follow Nate on Twitter @EatSleepCrypto.