Four Essential Questions on Bitcoin Privacy and Anonymity Answered
An attempt to end the confusion of some newcomers to this world.
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The popularity of Bitcoin continues to grow, as does the number of users of its network. However, many people who come to buy Bitcoin do not take the time to fully understand how Bitcoin works. The result is a lot of confusion about the privacy and anonymity of the Bitcoin network.
These topics remain unclear to many people.
Some people think that Bitcoin is an opaque system, but this is not the case. Bitcoin is a pseudonymous network. This is a notable difference. In what follows, I will answer four major questions that come up frequently in an attempt to end the confusion of some newcomers to this world.
1. How private is the Bitcoin network?
Transactions within the Bitcoin network are recorded in blocks within its Blockchain. The latter is permissionless and trustless. Anyone can read its content. However, the transactions made are pseudonymous. This means that only addresses are displayed. Your identity is not directly registered within the Bitcoin Blockchain.
Here is an example of an address on the Bitcoin network:
As long as your address is not linked to your identity, your anonymity is preserved.
If one of your addresses on the Bitcoin network is associated with your identity, all your transactions can then be traced. When you purchase Bitcoin via a trading platform such as Coinbase or Kraken, since you send these BTC on your hardware wallet, the platform can link your identity to that address on the Bitcoin network.
Bitcoin Blockchain analysis software can then deduce if the address belongs to a larger cluster of addresses you have. This can lead to uncovering how many BTC you own in total and all of your past transactions. Companies that constantly analyze the Bitcoin Blockchain also store all kinds of information, such as IP addresses, for example, to try to deduce even more information.
To conclude on this first question, you should always keep in mind that if you do not take specific precautions to protect your privacy on the Bitcoin network, you should assume that all your BTC transactions could potentially be associated with your identity sooner or later.
2. How can I acquire Bitcoin without revealing my identity?
You can obtain BTC units in three different ways:
By becoming a miner on the Bitcoin network.
By being paid in BTC for the work you do.
By buying BTC from fiat currencies on exchange platforms such as Coinbase or Kraken.
As you may have noticed, exchange platforms such as Coinbase or Kraken have strict KYC (Know Your Customer) policies. When registering for these platforms, you must provide a copy of your ID.
When you purchase BTC through these platforms, they will be aware of the association between your identity and your addresses on the Bitcoin network. This is why I told you earlier that without precautions, you can consider your activity not anonymous.
If you want to make your privacy and anonymity a priority, you can go to decentralized exchange platforms such as Bisq. Bisq makes it possible to connect peers who want to exchange Bitcoin for fiat money while having ingenious mechanisms to prevent the parties involved from trying to cheat.
The BTC that you will acquire via Bisq will not be linked to your identity. In the fiat world, the bank will simply see that you have made an outgoing transaction to another bank. The bank will not be able to know that this transaction was made to buy Bitcoin.
So it is an excellent method for acquiring BTC anonymously.
Liquidity can be a problem on Bisq. For example, you may only find sales for a certain quantity of BTC or at a slightly higher price than on decentralized trading platforms. Anonymity comes at a price!
Other solutions exist in the real world. You can exchange fiat cash for BTC with someone you meet. Some applications allow you to connect people wishing to make this type of transaction. This can be dangerous for your security. That’s why I don’t recommend this solution.
Finally, you can buy BTC in Bitcoin ATMs. There are more and more of them all over the world. Many Bitcoin ATMs do not ask for your identity. You come and pay cash for BTC that you will send to one of your addresses. The problem with this solution is that Bitcoin ATMs usually take high commission fees.
3. How can I make sure that my BTC does not remain linked to my identity?
Solutions to acquire BTC without revealing its identity exist. Nevertheless, centralized exchange platforms remain the most used and practical solution. They offer great liquidity, competitive prices, and are easy to use.
If you have purchased BTC via one of these platforms, you still can anonymize your BTC so that they are no longer linked to your identity. For this, the best is to use software wallets like Wasabi or Samourai. These wallets allow you to mix your BTC in a CoinJoin. A CoinJoin is a transaction to yourself where your BTC units are mixed with BTC units from other parties. The mixing is usually done with 50 to 100 other parties.
Thus, an outside observer cannot tell who is who once the transaction is validated. So no one can associate your identity with any of the addresses at the output of the transaction. Indeed, no one can know who is who in this type of CoinJoin transaction. You can even go one step further by participating in multiple CoinJoin transactions, reinforcing the anonymity of the participants.
Currently, a minimum of 0.01 BTC is required to participate in a CoinJoin transaction with Wasabi. Each CoinJoin mixes only the same amount of BTC. If you have more to anonymize, you will automatically be queued for the next CoinJoin. For smaller amounts, you can use Samourai. Both of these services charge a fee for the CoinJoin that is made. This remains low since it is about 0.003% per anonymization.
On a technical level, Wasabi and Samourai work on the TOR network which means that you will not reveal your IP address during the process. This is something essential. Using a VPN to hide your IP address remains an excellent practice anyway when you make transactions in BTC.
The Lightning Network which is a second layer on top of the Bitcoin network may be used in the future for this purpose. It continues to develop slowly but surely.
4. Why is it essential to protect your privacy in the Bitcoin world?
I often hear people say that they don’t make their privacy and anonymity a priority because they have nothing to hide. The issue lies elsewhere. I have nothing to hide either, yet I don’t want third parties to have access to all my Bitcoin transactions, and the total BTC I own.
Think about your emails for two minutes. You don’t have anything special inside your emails, but you don’t want third parties to be able to read them without your permission.
Well, the history of your monetary transactions is even more important than your emails. This data reveals a lot about your wealth, what you do with your money, or with who you make transactions. Think about it for a moment, and ask yourself if you want everyone to be able to link this to your identity?
I think the answer is immediate: NO.
Then you need to adopt good practices to keep your use of Bitcoin as anonymous as possible so that your privacy is preserved. I haven’t even mentioned here the risks you could face if malicious people find out how many BTC you own. With the price of Bitcoin continuing to rise, this is something you need to take seriously today.
More and more people will come to buy Bitcoin in the coming months and years. Unfortunately, too few people take the time to understand how Bitcoin works. However, it is a prerequisite to keep in mind that Bitcoin has nothing of the opaque system that the powerful people at the head of the current system constantly criticize.
Bitcoin is a pseudonymous network. If you don’t make your privacy and anonymity a priority on this network, everything you do on it could be linked to your identity sooner or later.
Even if you have nothing to hide, you need to make your anonymity a priority from your first steps into this new world. The information I’ve given you in this story will help you get started in that direction.
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