It isn’t uncommon to hear that Bitcoin (BTC) provides users with a means for anonymous transactions unlike fiat money transfers through banks and other financial institutions. The truth is that Bitcoin isn’t anonymous. It is very secure, much more so than bank transfers, thanks to its state-of-the-art blockchain technology that makes peer-to-peer transfers of electronic cash totally safe, but this doesn’t mean using BTC is anonymous.
During the first couple of years after the launch of BTC in 2009 by Satoshi Nakamoto, a lot of people didn’t really understand how Bitcoin works. Even within the crypto community, there were misunderstandings regarding how secure or anonymous BTC really is. Many new Bitcoin users and people who are generally new to the whole crypto world don’t really understand what aspects of the Bitcoin network make it so secure and that security doesn’t also mean anonymity.
Let’s take a closer look at how the Bitcoin blockchain works, how is it possible for a third party to trace your BTC-related activity, and what can you do to really increase your privacy when using Bitcoin.
How Does the Bitcoin Blockchain Work?
Bitcoin works thanks to the blockchain network that powers the digital currency and makes transactions possible. The blockchain is a sort of a decentralized, distributed public ledger of all the transactions that have ever happened on the blockchain, and anyone can track a transaction using a blockchain explorer site such as Blockchain.com. The network uses advanced cryptography and it has the form of a linear string of data blocks, each the size of 1MB, set chronologically from the first block to the most recent block.
The blocks contain transaction data that needs to be processed through the blockchain and verified as legit before a transfer can reach its final destination. Network nodes, which are actually Bitcoin miners with their powerful computers – mining rigs, are the ones that are responsible for verifying every transaction on the blockchain.
Several independent miners need to make sure a transfer is legit by finding the appropriate 64-digit hash that proves a transaction is valid and not a double-spending scam or fraud. When a miner finds the right combination, they disseminate it to the rest of the network in order to present a proof-of-work to the other miners, ultimately reaching a consensus within the network that a transaction is legitimate. This process of confirming a transaction takes 5 to 10 minutes on average.
Thanks to the proof-of-work algorithm, every transaction goes through a rigorous verification process before it gets approved and this is why your funds are so secure when using the Bitcoin blockchain. There is no fraud, no scam, and your money is fully secure. That’s why the Bitcoin blockchain quickly reached tremendous popularity a couple of years after its launch.
The sender and receiver addresses are complex strings of numbers and letters and they do not include personal information, but this doesn’t automatically mean that a transaction is anonymous. However, it is pseudonymous which does provide a certain amount of privacy.
How Bitcoin Transactions Can Be Traced
A Bitcoin transaction doesn’t list your personal information because it just contains a long string of letters and numbers, making you pseudonymous on the blockchain. This doesn’t mean your privacy is fully protected, because the encrypted addresses can be publicly checked on a block explorer and any interested party can see how much bitcoins a certain address has, along with its whole transaction history. This is why the blockchain is called a public ledger. Anyone can browse it.
Theoretically, a good way to hide your transaction history and preserve privacy is to use a new Bitcoin address for every transfer. The creator of Bitcoin, anonymous programmer Satoshi Nakamoto suggested that users should do precisely this when sending funds through the BTC network.
In practice, people just don’t want to spend so much time opening new Bitcoin wallet addresses for each transaction, especially if they commonly conduct business with bitcoins. A new address for every transfer would literally mean that you have to open a new crypto wallet account for every transfer. Sure, there are hundreds of crypto wallets on the market, and new ones are being launched quite often, but this would also mean that you need to spend time on creating new wallet accounts and memorizing new usernames and passwords all the time. Frankly, it’s very time-consuming and most people just won’t do it.
There are several ways you can protect your privacy when using BTC in a more practical manner, but first, let’s take a look at the most common methods third parties can use to track your Bitcoin activity.
Associating Your Bitcoin Address With Your Personal Info
A Bitcoin address doesn’t include your name or personal details. If someone sees your address on a blockchain explorer, they don’t see your name or other personal information. You are effectively pseudonymous, but to keep things that way you mustn’t, by any means, post your personal information along with your Bitcoin address anywhere on the internet, ever. If you do this on an internet forum, messaging app, or social media, it is very likely that your pseudonymity will be compromised.
Using Cryptocurrency Exchange Platforms
One of the most common methods for trading and exchanging cryptocurrencies is through crypto exchange platforms such as Kraken, Coinbase, and Binance. Bitcoin exchange platforms are a very handy method for conducting crypto trades and millions of people use them on a daily basis. Your funds are safe and it is, generally, a widely accepted method for trading cryptos. However, it does compromise your privacy in several ways.
The most popular and trustworthy exchange platforms have to accept strict Anti-Money Laundering (AML) legal regulations, along with Know Your Customer (KYC) protocols which require all users to provide extensive proof of their personal identity. Many exchange platforms require you to provide a photo or a scanned copy of your local government-issued ID, along with details like your personal address for billing, phone number, and sometimes even your employment details. This is a lot of personal information and it effectively strips you of any anonymity.
Additionally, these platforms also automatically record user IP addresses, linking your BTC transfers with your IP. In case your chosen exchange platform comes under a cyber attack with the aim of stealing user data, your private info can be stolen and even leaked on the internet. In case of any legal inquiry, many exchange platforms will also provide state authorities and law enforcement agencies with access to your personal info and transaction history.
Crypto Wallets Hosted on Company Servers
In order to store your BTC safely, you need to have a cryptocurrency wallet. In it, you can safely store your private keys or send and receive assets. Many web wallets and wallet apps store your personal information on their central company servers. These servers are usually well-protected from cyber attacks and informational leaks, but you can never be totally sure about where this info ends up. Hosted wallets also gather users’ IP addresses and in case a data breach happens, you can get your personal info stolen along with your BTC, that is if a third party gets hold of your private keys.
Buying Stuff With BTC
Buying products and services from online shops and retailers that accept Bitcoin is fairly easy, but problems can arise when you need to leave an address for your purchased goods to arrive at. When you make a Bitcoin payment, the vendor will see your crypto address, but when you also leave personal details for the vendor to send you your products, you have instantly created a link between your Bitcoin address and your personal identity.
Leaked Info Through Your ISP
When you purchase an Internet Service Provider (ISP) package to use the internet from your home, you always need to give your personal information. Every ISP company can view your IP address and knows the exact identity behind each address subscribed to its services. These companies can easily monitor BTC transfers linked to your IP address and therefore they can create a link between the Bitcoin address and your identity.
How to Increase Your Privacy While Using Bitcoin
Despite all the ways that your personal information can get leaked and linked to your Bitcoin transactions, there are several ways to improve privacy and pseudonymity while using BTC.
Use Several Bitcoin Addresses
We already mentioned that using a new BTC address for every transfer is very time-consuming and complex, but you don’t need to create a new wallet account for every transfer. It is totally fine to create several wallets and decide on using each wallet for different purposes.
You can have one wallet for trading BTC, one for making online purchases, and one for storing your assets. It will become rather complicated for someone to get a full picture of all the BTC in your possession if you use different addresses for specific purposes.
Choose a Top-of-the-Line Hardware Wallet
Hardware wallets are the safest method for storing your Bitcoin. They aren’t connected to the internet and most of them don’t even store any user data on their central servers. These specialized USB devices with several layers of security such as two-factor authentication, 12-word passphrases, advanced passwords, and PIN codes represent the best option for securely storing your Bitcoin. Trezor and Ledger have some of the most advanced hardware wallets on the market.
Do Not Disclose Your Identity When Buying Bitcoin
Another method for keeping your identity private when buying Bitcoin is to avoid classic centralized crypto exchange platforms because they store user identity data and other vital, personal information. You can try and buy Bitcoin from exchange platforms that don’t require a KYC protocol and therefore don’t receive info about your identity.
However, when you purchase some BTC with fiat money, you still need to link your bank account to the exchange in order to make the fiat currency transfer. So technically, you still compromise your identity. Another way better method is to buy Bitcoin with cash using a Bitcoin ATM. If there is no BTC ATM in your area, you can try and purchase Bitcoin using other cryptocurrencies such as the privacy-focused coin Monero (XMR) on a decentralized crypto exchange platform such as Uniswap, which doesn’t require personal info and isn’t linked with bank accounts.
Keep Your IP Address Private
The easiest way to compromise your identity is to leave your IP address traceable. You can really increase your privacy and anonymity when dealing with Bitcoin if you protect your IP address by using the TOR browser. TOR is a very handy browser that retains user privacy while browsing the web by hiding your IP address. You can even use a VPN (virtual private network) service to additionally increase your privacy and protect your IP address.
Tumble Your Bitcoin
A great method for retaining anonymity when dealing with BTC is to use a coin tumbler service such as CoinJoin Bitcoin Mixer to tumble your coins and mix the sources from which your bitcoins originate. This way, you will receive new bitcoins that aren’t tied to your address. It’s a great way to remain anonymous, however, you can’t be sure if the providers of these services are keeping any records. This is why it is important to find a reliable mixing service.
A Few Ending Words…
All in all, Bitcoin isn’t anonymous but it can have a high degree of pseudonymity for users that try some of the options we have listed. These tips can help you protect your identity and securely deal with bitcoins.