Bitcoin is popularly described as a way to transact anonymously on the internet. But how practical is Bitcoin anonymity? In this guide, we will examine the extent to which Bitcoin provides anonymity and how you can enhance anonymity in blockchain transactions.
Anonymity in Bitcoin refers to hiding the real identity of a party involved in a crypto transaction. That means you do not attach your personally identifying information when sending funds via the blockchain network.
The goal of anonymity in crypto is to conceal the real-world identity of a person engaged in a crypto transaction. It is designed to ensure that the real identity remains a secret. Instead of real-world identities, digital identities are used. These identities consist of a pair of keys, which are a private key and a public key, which are used to sign transactions.
The keys can be generated as many times as needed, creating different digital identities for one person. Since the transactions are recorded using these keys, it is believed that they cannot be linked to a real person. In practice, however, digital identities can be linked to the real-world addresses of those that used them.
Bitcoin transactions can be traced using IP addresses, public WiFi, and other digital breadcrumbs of data left behind during a transaction. However, there are proven methods to improve Bitcoin anonymity during transactions.
Modern Bitcoin wallets allow users to generate limitless receiving addresses when transacting in Bitcoin. It is good practice to use this feature whenever it is available. Doing so makes it harder for anyone to link two or more transactions to one person.
While the Bitcoin blockchain is resistant to hacking, all transactions are public. As such, anyone can check how much is held at each address. The more you use the same address, the more you catch the attention of hackers or anyone interested in your Bitcoin. Constantly changing address keeps them off your track.
Another ingenious way to maintain Bitcoin transactions anonymity is by using privacy coins. To do this, simply download a wallet service to enable you to exchange your Bitcoin for other coins. Exchange your coins for privacy-focused coins like Monero, which are harder to trace. Later, you can exchange your Monero for Bitcoin, making it harder for anyone to trace the funds continuously. When doing this, ensure you generate a new receiving Bitcoin address for each transaction.
Anonymous Bitcoin wallets are crypto wallets that let you store Bitcoin without requiring an email address, postal address, phone number, or any other identifying information (KYC). These anonymous wallets are usually hardware wallets. A hardware wallet is a wallet that is not connected to the internet. It is also known as a cold storage wallet. With a cold storage wallet, no one can tell where your Bitcoin is located, as they are stored offline. Each time you receive Bitcoin in the hardware wallet, a new receiving address is generated, which boosts Bitcoin anonymity.
A logless virtual private network (VPN) does not store your internet history on its services. It encrypts your traffic and routes it through multiple anonymous services at different locations before getting it to its final location. Sometimes, the logless VPN will use a shared IP address for multiple users, making it impossible to trace a single user’s identity.
Using a logless VPN when transacting in Bitcoin is another means of boosting your Bitcoin privacy. However, you must use a trusted VPN service that will not log your online activities.
Tor is an open-source browser built by a community of developers who believe in anonymity and surveillance-free internet use, and using it when conducting transactions is a straightforward solution to boosting Bitcoin anonymity.
When using Bitcoin for transactions, one way of being traced is via an IP address. Since the Bitcoin network is a peer-to-peer network, anyone can watch the transaction relays, and record the IP address. Full node clients relay all user transactions as if they came from them. Consequently, finding the source of a single transaction can be difficult since any Bitcoin node can be mistakenly identified as the origin of a transaction even if they are not.
While it is difficult to accurately trace a transaction to an individual, it is not impossible. A lot of variables have to be considered. For instance, if there is a crypto exchange account such as Coinbase tied to a device, it is possible to pinpoint the IP address of the device. However, the internet never forgets, and if someone is committed to investing time, they can trace the transaction.
Using Tor helps to hide the IP address so that it can never be logged during any transaction.
Another browser that comes with Tor in-built to it is the Brave browser. It is lighter, much faster than Chrome, and does not gather personal information. Tor encrypts and routes internet traffic via random computer nodes within the Tor network. Consequently, tracing the origin of traffic becomes nearly impossible.
In short, it dissociates the Bitcoin address from your IP address, which helps to improve your anonymity. However, if the site you send the Bitcoin to requires KYC, it defeats the purpose of using Tor. That is why you should consider using sites that require as little personal information as possible, for instance, anonymous Bitcoin casinos. These casinos do not collect any personal information except an email address and a crypto wallet. They allow you to gamble while remaining virtually untraceable.
A centralized cryptocurrency, like Tether, is controlled by a single entity. On the other hand, decentralized cryptocurrencies like Bitcoin are owned and controlled by the community.
When it comes to anonymity, there is a considerable difference between these two. With a decentralized cryptocurrency, the code is open to the public, and anyone can inspect it. Additionally, there is no central data collection point. On the other hand, centralized cryptocurrency runs on closed-source code. Consequently, the company behind it can be pressured into collecting private user data. Additionally, they can change the code of their own volition to collect user data.
In short, decentralization is crucial to ensuring anonymity in blockchain transactions. Without it, changes can be made to the code that weakens anonymity. For instance, a centralized blockchain could change the code, compelling users to provide private details to process transactions. With a decentralized platform like Bitcoin, implementing such code would be impossible.
While Bitcoin only provides pseudo-anonymity, the community could always vote to make it more anonymous. With centralized code, there is no incentive to do so, as the company operating it has to comply with KYC regulations.
There are several challenges to total Bitcoin anonymity, including:
Most crypto transactions still occur on centralized exchanges. These exchanges must comply with government regulation, which requires all customers to submit to a KYC process. Consequently, it makes it harder to remain anonymous.
Various taxation laws worldwide require that users file returns on their crypto transactions. Consequently, people must reveal their crypto transactions to comply with the law. This poses a significant challenge to total anonymity.
Most solutions to Bitcoin privacy require some technical expertise. For instance, one must configure their VPN to remain anonymous. When using the Tor browser, they will need to configure it for maximum privacy. The same applies to using hardware wallets. One needs to have some in-depth knowledge of how to configure it properly.
When you need to use your Bitcoin for online activities, like playing in Bitcoin casinos, most sites, apart from centralized exchanges, require a KYC process. This defeats any measures you may have taken to enhance your Bitcoin transactions’ privacy.
Bitcoin transactions are more traceable than cash since Bitcoin is recorded on a blockchain, while cash has no digital ledger. That means you can withdraw $10 from the bank today and spend it on anything without anyone knowing how you spent it.
Technically, notes can be traced to their issuing bank with serial numbers. However, that requires the one tracing to have the note with them. Various programs have been developed that make it easy to accurately trace any Bitcoin transaction in record time. As such, you must learn to send Bitcoins anonymously to maintain your privacy online using privacy-centric crypto wallets.
The lack of anonymity when using Bitcoin prompted developers to create more private coins. Today, several cryptocurrencies offer better anonymity than Bitcoin, the most popular ones being Monero, Zcash, and Bytecoin.
These coins have implemented solutions that encrypt transactions on the blockchain, making them harder to trace. For instance, Monero will randomize the crypto address during each transaction. Additionally, it muddies the size of each transaction. However, law enforcement and other enthusiasts are working hard to find weaknesses in privacy coins that would make them traceable.
Here are the strengths and weaknesses of Bitcoin anonymity.
The Bitcoin anonymity problem is the offering of only pseudo-anonymity during Bitcoin transactions. Users must take extra steps to protect their privacy, such as using the Tor browser and a privacy-focused VPN service.
The guide above provides valuable tips on how to send Bitcoins anonymously. It encourages using the Tor browser and other measures like using a logless VPN, switching your receiving address with each transaction, and using an anonymous Bitcoin wallet.
Bitcoin transactions occur on the blockchain and do not involve a third party. Credit card transactions are processed via a third party that maintains the network.
Anyone with a Bitcoin wallet can use Bitcoin. All they need is to acquire some Bitcoin, and they can send it to any BTC address without restrictions.
Table of contents