This Crack in Bitcoin's Armor Gives Investors 1 Excellent Reason to Buy Zcash

If you were designing a vault for your life savings, you would probably want features like walls nobody can break and doors that nobody can see through. Bitcoin (CRYPTO: BTC) delivers on aspects of the first part, but for the second part, Zcash (CRYPTO: ZEC) can do the trick, and the other coin can't.

Importantly, if the political climate evolves in a certain way, there is a chance that this distinction will matter a lot more than it does today. Let's unpack what that means for long-term investors.

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Transparency is a double-edged sword

Bitcoin's blockchain is public by design. That lets anyone verify the rules are being followed, but it also means that, in practice, every coin is tagged with a history. For very rich investors who worry about the risk of future political backlash and even potentially wealth grabs, transparency looks more like a crack in the armor.

Bitcoin isn't fungible in the way that a dollar bill or other fiat currency is. If someone else had previously used a dollar bill now in your possession for an illicit purpose, you probably wouldn't even know it, nor would anyone else.

On that note, the U.S. Treasury explicitly lists digital currency wallet addresses associated with sanctioned actors, and it treats those addresses like any other blocked property. In other words, a growing slice of coins becomes formally toxic once those addresses are named, and there's a clear trace to follow to see where every tidbit of value was disbursed.

Now, overlay that existing asset freezing and asset seizure tool kit with the politics of economic inequality, which, in case you haven't noticed yet, are in the process of becoming the dominant mass politics of our time. If a future populist coalition concludes that large visible pools of crypto wealth are fair game for wealth taxes, other special taxes, aggressive audits, or even outright expropriation, they would not need to break Bitcoin's cryptography to seize a tremendous amount of its wealth.

To be clear, that kind of outright expropriation is not current U.S. policy, and it is still a fairly remote scenario -- though it's more likely than it was in the past, and the odds look to be increasing steadily as economic inequality accelerates. The most likely path here is going to be tighter reporting requirements and maybe higher capital gains taxes or new wealth taxes, not mass seizures.

Still, for very wealthy investors thinking in decades rather than years, the combination of total transparency plus an increasingly sophisticated sanctions and surveillance system is a genuine vulnerability in Bitcoin's otherwise robust story. And that's where Zcash could swoop in and save the day for them.

Future wealth will want to be invisible

Zcash copies Bitcoin's key supply policies, like a fixed 21 million coin cap and a halving-style issuance schedule that reduces new supply roughly every four years. Just like Bitcoin, it's scarce digital money.

On top of that, Zcash layers in an optional privacy capability via a type of cryptographic proof called zk-SNARKs. The point of those proofs is that when holders use the coin's shielded addresses, the transaction amounts and counterparties of transactions are hidden, while still being cryptographically verifiable. This means that in theory, someone could keep a lot of their wealth off the public map.

Right now, Zcash is tiny compared to Bitcoin, with a market cap close to $5.1 billion versus Bitcoin's cap of $1.8 trillion. That scale difference is exactly what could make it interesting in the confiscation scenario. If, at some point, a small fraction of very large Bitcoin holders decided that being permanently traceable by third parties was not acceptable, rotating their capital into privacy coins like Zcash is one of the few escape options available to them without transitioning back into the traditional financial system. And even a modest reallocation of this type could matter a great deal for Zcash investors.

Of course, the story is not one-way. Zcash's privacy is precisely what makes regulators wary of it. Furthermore, it is also not obvious that future policymakers would tolerate a large, fully private monetary asset living beside the banking system.

For investors, the sensible way to square this circle is to treat Bitcoin and Zcash differently. Bitcoin should be the much larger allocation, as it's still the standard store of value in crypto. Zcash is better thought of as a hedge position to get a lot of upside if a very specific fear surfaces; it's worth buying today on that basis.

The key here is to see Zcash not as a better version of Bitcoin, but as a bet on one hole in Bitcoin's otherwise formidable armor becoming more important during the next couple of decades.

Alex Carchidi has positions in Bitcoin and Zcash. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.