Bitcoin is often referred to as the anonymous currency. This is because it is actually possible to send as well as receive bitcoins without necessarily giving away your personal identification information. However, attaining reasonable anonymity with this cryptocurrency can be a little complicated. This is because the bitcoin invention was meant to combat the challenge of censorship resistance in finance rather than anonymity. Even with this, it is still possible to transact bitcoin anonymously.
Ideally, bitcoin is pseudonymous, which means that sending as well as receiving bitcoins can be likened to writing under a pseudonym. In normal cases, if the author’s pseudonym is linked to their identity, anything they have ever written under that particular pseudonym will inevitably be linked to them. As for bitcoin, your pseudonym is simply the address you use to receive your bitcoins. Each single transaction involving this particular address is normally stored in the blockchain. In case your address is linked to your identity, each transaction you have ever made will automatically be linked to you.
Ironically, bitcoin is anonymous but still traceable. Ideally, each transaction can be tracked or traced on the blockchain. This means that it can actually be linked to all the public keys that are involved in that transaction. Broadcasting these transactions to the whole network boosts transparency, which helps the miners to know when a person is attempting to double-spend their bitcoins. Through this, law enforcement agencies, researchers or anyone who is so determined can follow the coins through the system, linking them to wallets that once held them. In theory, wallets are meant to be anonymous. In fact, there are so many places where one can create these wallets without linking them to the physical world.
However, if a wallet is linked back to the user, for instance through a bank account or email, it becomes easier to trace each single transaction that was made by that particular user. This is particularly common when one is dealing with the traditional financial institutions. For instance, before one is allowed to exchange his/her bitcoins with the fiat currency, a lot of the individual’s personal information is normally taken down. These requirements are mainly linked to the anti-money laundering policies. In spite of the many regulations that are placed at the entry as well as exit points of this bitcoin ecosystem, it is still possible to attain high levels of anonymity while using this cryptocurrency.
To avoid identification, there are measures you can take while transacting in bitcoin so as to minimize the amount of personal information you leak. Below are some of the tips you can use to remain anonymous:
- Use a different address for every transaction. This will prevent a situation whereby different transactions are automatically linked to you.
- Choose an address that does not reveal personal information about you.
- You can opt for personally generated coins.
- If your bitcoin balance is contaminated by both non-anonymous and anonymous coins, you can anonymize it by sending huge amounts of your coins to an e-Wallet account. You can use multiple e-Wallet services for optimum results. With this method, the attacker will need to access the e-Wallet’s transaction log so as to continue following the transaction history. However, you need to be certain about the e-Wallet service providers before using them so as to avoid losing your hard-earned coins.
- After anonymizing your balance set up, make sure you keep the non-anonymous and anonymous balances separate.
Note that the future version of the bitcoin transaction system will be more reliable as it will involve trusted relay servers, which will be operating on the friendly addresses with a more enhanced privacy protocol. This will provide bitcoin users with convenience and stronger anonymity. This will in turn eliminate the need for one to choose between ease of use and privacy.
Helping Other Users to Remain Anonymous
Below are some of the steps you can take to help other people transacting in bitcoins to remain anonymous:
- You can set up an external bitcoin mixing service. It should resemble e-Wallet services but always ensure that the user does not withdraw the exact coins they put in. You also need to delete empty addresses as well as transaction logs.
- Keep a large amount of your bitcoins in an e-Wallet. If someone needs to stay anonymous, but needs a huge amount transferred, make sure you send them the bitcoins in small increments until they reach the amounts they want.
Bitcoin Anonymity & the Transaction Ledger
Note that there is no limit placed to the total number of addresses one bitcoin holder can control. It is upon the person to decide whether his/her bitcoins will be stored in one address or be dispersed in multiple addresses. However, good practice recommends each address be used just once. In fact, even the balance that remains after a transaction should be kept under a new address. Such proliferation of addresses helps to obscure the identity of the owner. This makes it hard for one to trace the flow of coins to a particular person over time.
The Future of Bitcoin Anonymity
Cases involving BitInstant and Silk Road and many other companies within the Bitcoin space have shown that Bitcoin still has a lot to do in terms of enhancing the anonymity of users. Having said that, there are currently many cryptographers and programmers who are working on technologies that will ensure absolute anonymity for all bitcoin users in future.
These bitcoin anonymity features, will go a long way in ensuring that the system is safe, secure and reliable especially to people who may not want their transactions made public. With all these improvements in place, we might not be far from an absolute anonymous cryptocurrency, one that makes it impossible for other individuals to track the history of any bitcoin transaction.