A More Current (2018) Update on Bitcoin’s Anonymity

Aside from Bitcoin’s price, which is constantly the specific aspect of the cryptocurrency that’s talked about a lot more than anything else, there are a lot of other things that affect how much faith people put into its ecosystem.

You may have heard at some point from someone that it’s an anonymous coin, and therefore your financial activities are out of the eyes of your government or any potential snoopers. Then you might do a little research and maybe come across a piece like this that explains that this isn’t necessarily the case. Counter-arguments get thrown around, the discussion heats up, and suddenly Bitcoin’s case for anonymity is unclear again.

In this article we discuss this again in mid-2018 to reflect many of the changes that cryptocurrencies have been through.

bitcoinanonymous-hierarchical

The term “hierarchical deterministic” is often thrown around when talking about wallet structure in more recent years. You might know this as the “HD wallet” phenomenon. This is a concept implemented in Bitcoin that allows some wallets to change their receiving address during each and every transaction. It will look to an outside observer scanning the ledger as though a bunch of addresses are sending a significant amount of coins to a bunch of other addresses.

Of course, the truth might as well be that all those addresses are sending coins to your address.

This should be anonymous, right? It isn’t.

The whole HD concept wasn’t designed for complete carefree anonymity in the first place. In fact, it’s used to help secure your presence on Bitcoin by making it just a little bit more difficult to track the source and destination of funds. But if you look at my third Bitcoin address on a blockchain explorer, it will have the same exact balance and send/receive amount as the first.

Because all transactions on Bitcoin’s ledger are public, it’s easy for anyone to just pull up your balance sheet using any of the addresses. Your wallet didn’t change; only the address it uses to receive one particular transaction did.

bitcoinanonymous-blender

For those unfamiliar, a mixing service attempts to break the association between a transaction and the wallet that made it. This is usually done by mixing (hence the name) the transactions between multiple parties to make it as difficult as possible to determine the funding source.

To fully understand how this works, let’s look at a scenario. You want to send 1.5 BTC to another address because you want to buy an outrageously expensive mountain bike or something. If you send it directly, your 1.5 BTC will travel from point A to point B, clearly visible on the ledger.

However, if you send this money through a mixer, other transactions are added to yours and tumbled around through some Internet magic, coming out the other end – once again – mixed up with all the other transactions. Let’s say you send 1.5 BTC like in the previous scenario into a mixer. It may mix your transaction in with four others. With yours included, let’s say that the sum total sent through all these addresses is 8 BTC.

On the ledger a person will see this transaction as 8 BTC sent from four addresses to four other addresses. How many BTC did any specific address send? It’s anyone’s guess. This may be an oversimplification, but it’s the one that takes the least amount of time to get you acquainted with the concept.

Is this anonymous? Yes, it is!

If applied correctly, done through onion routing and mixed in with a significant amount of transactions, you could give anyone trying to track you a very tough time.

There is, however, a caveat to all of this. Most mixing services will fail to tumble your coins through a large number of transactions. It’s the same problem with Monero’s ring signatures. If your wallet sends transactions frequently, the pattern is still there. If someone spots your address enough times in several mixing transactions, it’s not very hard to put two and two together.

bitcoinanonymous-tracing

It should be no surprise to anyone by now that Bitcoin isn’t the most friendly currency when it comes to making anonymous transactions. After all, its blockchain is completely public, and anyone can just look up your address and find your transaction history. Why people thought this would anonymize anyone completely is beyond me.

However, that doesn’t mean that you can’t make anonymous transactions on Bitcoin. Here are a few pointers:

  • Never buy from an exchange. As soon as you withdraw to a wallet, the exchange has your name and personal data, attaching all of that to the withdrawal address. It’s just common sense.
  • Always buy in cash, using as much prudence as possible on local markets to prevent yourself from being mugged. Do not exchange personal information with the individual you choose to buy Bitcoin from.
  • Carry multiple wallets. It should be obvious that having only one wallet to do your bidding with will inevitably lead to traceability. You could always mix transactions with more of your wallets, making the job of tracing you that much more difficult.
  • Use mixing services with very large trading volumes and no logging.
  • Use onion routing when transferring anything.

And that’s about it. If this sounds complicated, that’s because you’re trying to work anonymously in a blockchain that wasn’t designed for complete anonymity. If you want something a little bit easier to work with, try a privacy coin like Zcoin, Zcash, PIVX, CloakCoin, or DeepOnion (if you feel like punishing yourself a little). Even in the situation in which you choose to use one of these coins, most of them will work best if you run a full node (e.g., use only their official desktop software to work with the coins) and exercise an incredible amount of prudence.

If you’re not willing to put the work in and learn about how blockchain tracing methods work, it’s probably best you just assume that your transactions aren’t untraceable. Sooner or later someone somewhere is going to find out how to circumvent your preferred method of anonymizing your transactions, which is why most people who are into the whole privacy shtick don’t use just one method, just one coin, just one wallet, or rely on one single failsafe.

Would you like to know more about how blockchain tracing works? Do you have a stake in any of the coins mentioned here? Let us know in a comment!

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