Bitcoin anonymity – myth or reality?

The bitcoin cryptocurrency was announced as completely anonymous, but the current implementation of the project is rather pseudo-anonymous. Bitcoin’s pseudo-anonymity is due to the open blockchain registry , in which anyone can track the transactions of other users.

Veterans of the crypto community are familiar with the peculiarities of bitcoin and know that the anonymity of its use is possible up to a certain point, and only by knowing the privacy features of cryptocurrencies, users can prevent identity disclosure.

Why is Bitcoin considered anonymous?

Bitcoin is considered anonymous because it has a number of features that allow users to maintain privacy.

Unlike conventional banking and electronic payment systems, cryptocurrency accounts do not require personal information and are not tied to a specific person. Anyone can open a Bitcoin address at any time without specifying their full name, passport data, phone number or any other information that is usually requested from financial institutions.

Transactions are also not tied to the identity of users. In order to make a bitcoin transfer, it is enough to know the recipient’s public address . When verifying transactions, miners only check the presence of available coins on the sender’s address.

Transfers in the system are checked by randomly selected communication nodes linked by IP addresses. For communication nodes, it remains unknown which of the communication nodes created the transaction, and which one only redirected it.

These differences from the usual financial models make it possible to call bitcoin anonymous, because as long as the coins function exclusively on the network, their user remains unknown. It is worth remembering that transaction data is stored in the public domain, which is why Bitcoin is called pseudo-anonymous. On the one hand, it does not require or disclose user data, on the other hand, it provides complete information about the movement of coins.

Properties of anonymous cryptocurrencies

After the anonymity of bitcoin was questioned, the developers came to the conclusion that it was necessary to solve the problem of pseudo-anonymity and began to develop a new generation of cryptocurrencies with increased privacy.

To date, many completely anonymous cryptocurrencies have already been developed that prevent tracking of the blockchain ledger or deliberately confuse transactions, making it difficult to track them. The most famous of them are:

Monero: An anonymous cryptocurrency, in which information is added to the blockchain ledger in a distorted form, monero price which significantly complicates tracking users.

Dash:  Anonymity in the system is achieved by mixing user coins. An anonymous transaction does not go directly to the user, at the beginning it is sent to the masternode, where transactions are “split” into small parts and mixed together in several stages, after which they are formed into new transactions and sent to recipients. Thus, the connection between the sender and the recipient is broken.

Zcash: User confidentiality in the system is achieved through the use of the zero knowledge protocol. It works according to the principle: in order to verify a transaction, it is enough to confirm the fact of its existence, but you do not need to know the addresses of the recipient and the sender.

Can Bitcoin be tracked?

Cryptocurrencies have attracted special attention precisely as an anonymous means of payment. This feature has been appreciated by many users who, due to certain circumstances, do not wish to disclose personal data when conducting financial transactions. At the same time, an open blockchain registry is able to transfer to third parties much more information than an ordinary user assumes.

The anonymity of bitcoin meant only the absence of the need to provide personal data to use the system. But since digital coins operate on a blockchain, which is an open database where everyone can view a list of other users’ transactions, all activities in the system can be tracked.

You don’t need to be an advanced programmer or have a financial education to track transactions on the blockchain. Anyone can track the chain of transaction blocks from the moment the coin is issued to the current transaction in Blockchain Info .

Therefore, in fact, bitcoin is anonymous exactly as long as the user has not linked his personal data with the cryptocurrency address. As a rule, the binding of personal data to cryptocurrencies occurs at the stage of making purchases and when withdrawing funds offline.

The history of transactions in the Bitcoin system must be kept open for security purposes, but this significantly reduces the level of anonymity.

Let’s say someone made a purchase in an online store and paid with Bitcoin. On the seller’s website, it was required to indicate the full name and delivery address. From that moment on, the buyer’s address cannot be called anonymous, since there was a link to personal data and theoretically, on the basis of this data, the involvement of the address owner in all previous and subsequent transactions can already be proven.

How do I conduct transactions anonymously?

The cryptocurrency market does not stand still, and the presence of coins, in which anonymity was given special attention, greatly simplifies the concealment of identity for users. In other systems, the user’s privacy depends on how thoughtful his actions will be.

In order to protect confidential data and not become a victim of intruders or government agencies, the user must adhere to the following principles of working with them:

Hiding the IP address. There is a possibility that the IP address with which the transaction is associated can be traced, therefore, when conducting operations with cryptocurrencies, it is recommended to use TOR and other services to hide the address.

New address for every transaction. The use of different addresses for incoming and outgoing transactions significantly complicates identification of the person and makes it impossible to count the exact number of coins on the user’s wallets. In most wallets, this new address is automatically generated for every transaction.

Bitcoin mixers . There are special services that allow you to shuffle coins and complicate their tracking. With their help, the user can send a certain number of coins, which will be mixed with the coins of other users and, as a result, new coins will be credited to the account that are not related to previous transactions.

Large transactions. It is recommended to avoid large transactions, because they are the first to attract the attention of regulatory authorities and attackers. If you need to make a large payment, it is recommended to divide the transfer amount into several separate, not too significant transactions and send from different addresses.

It should be remembered that identity disclosure occurs at the moment when the address of the cryptocurrency wallet is associated with the user’s personal data, therefore, in order to maintain privacy, purchases in marketplaces where personal data are required should be avoided, and before cashing out the cryptocurrency, you should create a new address and clear old coins.

conclusions

Bitcoin is not completely anonymous. In case of careless handling, the identity of the coin holder can be established by tracking the blockchain ledger.

Many developers have begun to solve the problem of pseudo-anonymity of most cryptocurrencies. Already, there are many anonymous cryptocurrencies that work on a more advanced algorithm that breaks the connection between the sender and the recipient. In other cryptocurrencies, users must independently take care of their privacy.

Pavan Kumar
Proud organizer. Food nerd. Extreme thinker. Evil alcohol expert. Falls down a lot. Freelance music buff. Explorer.

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