Bitcoin was envisioned as an anonymous way to transact. This is not entirely the case unfortunately. Instead Bitcoin is pseudonymous.
Every Bitcoin transaction is stored in the blockchain, and is publicly visible.
While it is true that no one can directly see who you are or where you’re sending your crypto — the transactions associated with every wallet address are publicly viewable.
When you send or receive Bitcoin, you are using your Public Key. This is your Bitcoin address and it looks something like this: at1qdt67srtr7xffvy123456lydnw9r134gtzswf5ntf.
This is not to be confused with the password or PIN that you use to sign into your Bitcoin wallet, this Public Key simply represents your Bitcoin account on the blockchain. Anyone can see the entire transaction history that is tied to that key.
So a Public Key is considered a pseudonym because your name is not directly linked to it.
Note: Nearly all cryptocurrencies use decentralized public blockchains, but there are a few designed specifically to be centralized and/or private.
OK So What’s the Big Deal?
If your Public Key is not tied directly to your personal identity but the transaction history of your Bitcoin address is publicly visible – where does privacy or anonymity become an issue?
Well, in order to buy BTC through an exchange, you’ll very likely have to register and provide and verify your identity. Exchanges require personal information to comply with KYC (Know Your Customer) and AML (Anti-Money Laundering) laws enforced by most governments. This connection is the reason why Bitcoin is not fully anonymous.
The personal information collected by exchanges is a gateway to linking all your Bitcoin transactions on that exchange to your personal identity.
This is a fact you’ll have to face in order to buy BTC. (Being paid directly in BTC, mining BTC or using an exchange without KYC are the only ways not to have your ID connected to your crypto wallet).
It’s worth pointing out that none of this poses much risk to the average law-abiding citizen.
But the bottom line is that Bitcoin is less a private cryptocurrency and more a public cryptocurrency.
How Can We Increase Our Bitcoin Privacy?
Essentially, to increase your Bitcoin privacy, interact with individuals directly (Peer-to-peer), not exchanges, institutions or organizations. They are most likely to want to know who you are, and most likely will want your drivers licence. An individual won’t want to deal with that headache and there’s no law requiring you to provide personal information to other people. The only real concern for the people involved should be whether an agreement has been met, and this is taken care of by the blockchain technology.
Can my identity be tied to my Bitcoin wallet if I didn’t register for it?
It would be very difficult but not impossible. When you transacts on the Bitcoin network, patterns can emerge that can help uncover the identity behind it.
For example:
- Similar amount spent
- Regular transactions
- Transacting with only a few addresses
But it’s worth pointing out that establishing patterns and linking them to an identity is not an easy thing to do. The average person is not going to have the ability (or a reason) to pull this off. Chainalysis companies set up to track identity through Bitcoin are plentiful.
You can even do the first steps of tracking an identity yourself. You can look up individual blockchain trades on certain websites. Go here and play around for a bit, https://www.blockchain.com/explorer, to get an idea of what can be done.
Note: One of the original goals of Bitcoin was to fight the opacity of big institutions like central banks and offer a transparent ledger of peer to peer transactions. So again, the entire history of every Bitcoin transaction can be seen at any moment on the Bitcoin blockchain. To ensure confidential transactions, you must use different technologies.
Should I Be Concerned About My Privacy?
Privacy should be a concern for you anytime you’re online, especially when using cryptocurrencies. Your privacy is closely connected to your security although it’s not exactly the same thing.
Goldfeder listed major merchants that allow Bitcoin transactions (Microsoft, NewEgg, Overstock…) and studied how Web trackers leak information from each of these sites during the purchase process. They found that “at least 53/130 of merchants leak payment information to a total of at least 40 third parties, most frequently from shopping cart pages”. Web trackers and cookies—small pieces of code that send information to third parties about the way people use the site—send personally identifiable information such as your name, address, and e-mail.
Again, if you are not doing anything illegal and plan on paying taxes to the IRS, transparency might not be a concern for you. But privacy is also a human right and is key not to be targeted by a thief or a hacker.
How Can My Identity Be Traced?
The main way to trace your Bitcoins back to your identity is to track your transactions back to your first purchase of BTC. Most exchanges ask for proof of identity. We know we had to provide it. They are forced to do that by governments, through various pieces of legislation, to give visibility to central regulators.
Because of this, even if you’ve carefully stored your BTC in a cold wallet inside a metal box and buried it in your backyard, there will still be a record of the transaction history and the point where it was purchased on an exchange by you.
Another thing to consider is using Bitcoin to buy something from an online merchant. If you spend Bitcoin at an online store or merchant they could have a record of who you are and possibly your shipping information as well as your BTC address. Our internet is now not set up to protect identity, but instead to track it, and it is hard to get around that.
How Can I Protect My Identity?
One of the best ways to protect yourself is by using a VPN or a Tor browser. These help you stay anonymous online by masking your IP address and therefore dissociating any Bitcoin related traffic that your internet service provider can see. Still, if your Exchange has your ID, this step won’t be very effective.
Our recommendation is ExpressVPN. You can purchase a subscription with Bitcoin, through a wallet you can dissociate with your identity if you really want to take extra measures.
The most private way to interact with the Bitcoin blockchain is through a crypto wallet, not through a cryptocurrency exchange. The public keys generated by this wallet are not associated with your personal identity on the blockchain unless you registered for it and provided your personal information. Without this info, you can’t be identified directly when you transact in a decentralized manner.
A good example of a Crypto wallet that doesn’t require your ID is Exodus. Although it’s worth noting that if you buy crypto with fiat on Exodus (by ApplePay) you will be identified by your Apple iD and your credit card information.
Should I Use Exchanges?
Exchanges are not the best place for privacy but they are often the most convenient place to buy or to exchange cryptocurrencies. However, should the exchange ever be hacked or forced to release customer information, your identity, your holdings, or both certainly will be compromised.
The best example to date is the Japanese exchange called Mt. Gox which got 850 000 BTC stolen in 2014… a whopping $450 million dollars at the time (imagine how much it represents now). In 2019, twelve crypto exchanges were hacked which totaled 300 million dollars and accounted for 500 000 user logins. Do not trust an exchange by leaving your crypto sitting on it.
It doesn’t happen only to exchanges. In 2020, a breach on Ledger’s marketing database shook the community. The hack released personal details and contact information for 272,000 customers. The funds of Ledger’s clients are safe, presumably in cold storage, but the identities of the people who bought them are now out in the open.
The risk here is that someone who knows that you’ve purchased a hardware wallet might consider trying to rob you of its balance.
Is There Any Way To Avoid Sharing My Identity When Buying Bitcoin?
Yes. If you wanted to buy Bitcoin without providing ID you’d need to use a specific type of exchange.
Bisq uses a peer-to-peer network and open-source desktop software that doesn’t require any registration. It is one of a few exchanges that doesn’t require KYC to start buying through a cryptocurrency market. Trade Ogre is another.
Note: Some Bitcoins may have been used in illicit activities, and these non KYC exchanges may have a larger proportion of “dirty Bitcoins”. As for if they’ll be taken from you afterwards by a government, we haven’t found much info on that. It could be risky, it might not be.
Can I Avoid Sharing My Identity When Using Bitcoin?
When you use a private wallet, you often can’t trade fiat for cryptocurrencies. Wallets are mainly used to do crypto to crypto exchanges. For this reason many of the best crypto wallets don’t require personal information. You can transact with as many different blockchains as you wish.
A few of the best crypto wallets include:
- Exodus
- Mycelium
- Ledger
- Trezor
The first two are hot wallets, meaning that they are apps connected to the internet. These wallets offer convenience and ease of use.
The last two are cold wallets, meaning that they can be kept completely offline. As you’d expect, they offer greater security but less convenience.
Both hot and cold wallets are always a better option for storage and privacy. These four wallets are non-custodial, meaning that YOU have the control over your Private Keys. It’s not possible for anyone but YOU to enable a transaction on the Bitcoin network. Thus, you are less susceptible to a ransomware attack.
What about Bitcoin ATMs?
Back in 2013, the first Bitcoin ATM was up and running. You could just feed in a few 20s and get some Bitcoin. Those days are long gone.
Bitcoin ATMs differ because they do not connect to a bank account and instead connect the user directly to a Bitcoin wallet or exchange. The vast majority of Bitcoin ATMs require either your cell phone number or a scan of your ID. Most governments are very serious about this.
On the 29th of May 2021, a Bitcoin ATM operator who owned and managed 17 Bitcoin ATMs was sent to US federal prison for 2 years! He didn’t enforce AML laws and was punished for it.
Ok Forget Bitcoin – What About Privacy Coins?
Cryptocurrency is essentially money + technology. It’s a type of software after all. Thus it can be programmed in many different ways, for many different purposes. Some of those purposes are privacy, and some cryptocurrencies are subsequently programmed to focus on privacy. They are called privacy coins.
How Do Privacy Coins Work?
Privacy coins use more advanced technologies to keep the identity of users and the origins of their transactions completely private. Some of the technologies used are stealth addresses, ring signatures, and zero-knowledge proofs.
But can we use these digital currencies without sharing our identity?
Though very advanced in terms of privacy, these coins are more likely to be banned in some countries or delisted from exchanges. South Korea, which is one of the big hubs for cryptocurrency, started in 2021 by banning Zcash and Monero. Some countries like the US take another stance: they hope to de-anonymise privacy coins in order to gain transparency over the network. So far they have not been successful.
Privacy coins are programmed to hide the sender and receiver’s information, the amounts of a transaction and the transaction history. In doing this they’re preventing others from tracking you to your original purchase, or mining, of a cryptocurrency.
However, spending any coin is still likely to reveal your identity, especially if you shift the coins to your bank account. As far as we are aware, there is little to prevent this from occurring.
In general, privacy coins are not as broadly used in the crypto space as Bitcoin or Ethereum but they aren’t obscure either. Monero (XMR) is somewhere around 25th overall of the crypto market coins listed on CoinMarketCap. ZCash (ZEC) is around #60.
Which Privacy Coins Best Protect Identity?
Privacy coins are uniquely programmed to protect identity, through use of cryptography. Unlike the Bitcoin blockchain, little data can be accessed by third parties. The amount you have in your wallet cannot be accessed. Even your wallet address (i.e. bank account number) is completely hidden. Monero, the most popular privacy cryptocurrency, is excellent at hiding your address, the path your personal data takes to your address, and even your place on the Monero blockchain.
Thus, a privacy coin can better protect identity (through potentially anonymous transactions) but like all the other protections, they aren’t foolproof.
Monero
We have to start this list by talking about Monero. It is the most valuable privacy coin by market capitalization. And it is incredibly effective at hiding identity. We know that because most hackers want to be paid in Monero. It’s effective because it makes private transactions untraceable using technologies called “ring signatures”. As a result this privacy coin hides identities. It goes so far as to actually obscure the amount of coin sent, too.
Even better, only CPU’s can maintain and mine Monero. That makes only computers like yours and mine (laptops and desktops) able to mine the currency. No big warehouses can be set up to mine this currency, so you actually have a chance. Monero also uses the latest algorithm technology, called RandomX, to enforce the private nature of the currency.
RATING: 5/5
Technology: Random X
Anonymity: Medium
Current Network Size: Medium
Potential Network Size: Medium
Ease of Use: High
Zcash:
Zcash is similar to Bitcoin, but it comes with additional privacy features. This privacy focused cryptocurrency obscures the addresses and the cryptocurrency transaction amount. These additional privacy features are based on Zk-SNARKs technology. This uncommon name stands for Zero-Knowledge Succinct Non-Interactive Argument of Knowledge. Zero knowledge basically means that one party can prove to another party that they know a value X, without conveying any information about X. Thus traceability is low.
RATING: 5/5
Technology: zk-SNARKs
Anonymity: Medium-High
Current Network Size: Medium
Potential Network Size: High
Ease of Use: Medium
Dash
Dash is very similar to Zcash (and Bitcoon). Instead of avoiding communication about the item of value, Dash anonymizes the identity and location of your coins through a technology called JoinCoin. They also have two layers of network that operate according to different principles, making tracking even more difficult. The best known feature they have, privatesend, allows private and anonymous transactions. Unlike Monero, this isn’t baked into the coin.
RATING: 4/5
Technology: CoinJoin (or derivatives)
Anonymity: Low-Medium
Current Network Size: Low-Medium
Potential Network Size: High
Ease of Use: Low
ARRR
Pirate Chain (ARRR) uses the same technology as Zcash (zk-SNARKs) and also protects the user IP with embedded Tor network and onion router compatibility. It’s privacy is opt out, so the person you are sending coins to may not have their identity protected. That is one of the reasons that ARRR is less known and less well used than its brother Zcash.
RATING: 3/5
Technology: zk-SNARKs
Anonymity: Medium-High
Current Network Size: /
Potential Network Size: /
Ease of Use: Low-Medium
Note: Litecoin is looking to add mimblewimble privacy protections (opt in) to it’s blockchain sometime in 2021. We don’t think that opting in is the best way to make privacy happen, but we might be happily surprised.
Key Takeaways:
- It is very hard to completely hide your identity on the internet, even with Cryptocurrencies.
- Most exchanges have to track your identity.
- Private (cold) wallets are a good way to start guarding your privacy.
- Use a privacy coin to somewhat sever the link between your identity and your coin.