- Bitcoin is secure, decentralized and private but it is not anonymous.
- The transparency of Bitcoin allows people to easily track money flows and if an individual’s identity has been linked to a wallet, then it is possible to know who is behind the transaction.
There is a widely spread myth in the cryptocurrency industry that Bitcoin is anonymous, and while it hurts, the truth is that it is not.
When Satoshi Nakamoto introduced Bitcoin in 2008, he described it as a peer-to-peer (P2P) electronic currency system that relies on digital signatures to prove ownership and a public history to prevent double spending.
Bitcoin is secure, decentralized and private but it is not anonymous. But if it’s private, why isn’t it anonymous?
In the context of financial transactions, privacy means that the transactions themselves do not reveal information as it is for what the money was used, the location of the people who were part of the transaction and does not reveal the data of the participating users.
However, even though the transactions themselves do not reveal information about the identity of the individual, The fact that the Bitcoin blockchain is an open book means that transactions are traceable.
Bitcoin is not anonymous because third parties can know the sender and receiver. And, as more countries force implement Know Your Customer (KYC) rules, anonymity on the Bitcoin blockchain disappears even further. The fact that KYC rules require people to reveal their identity on centralized platforms makes it easier to trace transactions back to the identity of the individuals involved.
The Bitcoin blockchain is an open book
The Bitcoin blockchain, in a simplified way, is a historical record of all Bitcoin transactions and being a public blockchain and with Open Source software, it means that any individual in the world can verify each and every one of the transactions they have had. place.
The transparency of Bitcoin allows people to easily track money flows and if an individual’s identity has been linked to a wallet, then it is possible to know who is behind the transaction.
By using a Bitcoin block explorer, we can see what the latest transactions have been that have taken place on the network. To exemplify this we take a random address and the network does not say that this address “has made 4,027 transactions on the Bitcoin chain. He has received a total of 2.26669246 BTC ($44,255.54) and has sent a total of 2.26430751 BTC ($44,208.97). The current value of this address is 0.00238495 BTC (46.56 US$)”
If we continue exploring the information of this address we can see things like:
- The addresses of the wallets that participated in the transaction, both who sends and who receives.
- The value of the transaction: 0.4199 bitcoins.
- The commission that was paid.
- The time the transaction occurred and the hash.
A wallet address, at least in itself, does not reveal the identity of users because they are not always linked to data such as names, phone numbers or physical address. However, a wallet address is like using a pseudonym for the user.
As we can see in the image, With the address, a third party can see all the payments that have been made, on what dates and even what is the balance of Bitcoin that you store in that wallet.
Given the number of transactions that have been made with this wallet, it is possible that there are traces of information about the individual who operates it, such as the name or physical address.
How are transactions tracked?
In the early days of Bitcoin, Cryptocurrency was believed to be as anonymous as cash, and as is often the case, criminals saw an opportunity to launder money or finance terrorism without revealing their personal information.
Bitcoin is more private than a credit card but less anonymous than cash. An individual’s identity is not necessarily linked to a Bitcoin address, but it may be. For example, when a person posts his address on a social network and thereby links the address to his name.
With increased regulation and surveillance, governments began requiring centralized crypto exchanges that people must identify themselves in order to operate, making it easier to identify individuals.
When an individual trades from a wallet to which they have not directly associated their information, it may take longer to discover the information but it is still possible.
Tracking transactions to users’ personal information is a process that requires time and effort. However, blockchain forensic analysts have managed to develop solutions to make the task easier.
Information Leakage Points in Bitcoin
- If a user does not use a VPN to mask their IP address, it can be leaked when making a transaction in Bitcoin. Here the privacy of the user can be highly compromised. In fact, it is suspected that some governments were able to acquire nodes where they store information.
- Centralized wallets: With them, people delegate their privacy to a third party.
- Platforms for Buying – Selling Bitcoin: Some may intentionally share information about their users or be hacked and, with this, the privacy of people is exposed.
- Sometimes it is the same people who make decisions that violate your privacy. For example, by posting his name along with his Bitcoin wallet address on a social network. By doing this, any individual who takes the time will be able to look up the information associated with that Bitcoin address.
Probably from the last leak point the question arises: Is it unsafe to share my wallet address on social networks? The answer is no. Cryptocurrency addresses are public and sharing them will not compromise the funds you store. What should never be shared are the private keys.
However, sharing a wallet address publicly is like posting a personal ID, it would be like sharing passport information on your social media account. Your privacy would be compromised.
Is identifying a person in the Bitcoin blockchain easy?
Not necessarily. People can take steps to make it harder for them to be identified on the Bitcoin blockchain. For example, they can use a variety of wallet addresses or use cryptocurrency mixers.
By using these options, a person will be making it difficult to track transactions and finding your ID will require a greater amount of time and energy.
How to increase the degree of anonymity in Bitcoin? privacy is important
If possible. This requires understanding the technology, what the risks are, and how to avoid taking away your privacy.
Here are some tips if you want to increase privacy when using Bitcoin:
- Use a VPN.
- If you use a centralized crypto exchange, make sure you use that address only in your favor. This address will be associated with your identity so use it with that in mind.
- Having multiple Bitcoin addresses is also a useful tool to increase privacy. By creating a Bitcoin wallet, it is possible to generate virtually infinite addresses. So, one way to take care of privacy is to never reuse addresses.
- And lastly, cryptocurrency mixers like CoinJoin. However, it is critical to understand that while they can achieve anonymity within a transaction, there will still be evidence on the Blockchain that a mixer was used. Governments and regulators can penalize a cryptocurrency address for having used these types of protocols. This is precisely what has happened with Tornado Cash. Therefore, using this type of solution comes with certain risks that must be evaluated.
final thoughts
Bitcoin is not a cryptocurrency designed to achieve anonymity among participants, and precisely for this reason a series of specially designed cryptocurrencies emerged with the aim of increasing the privacy of the individuals who use them. For example, Monero and Zcash are blockchains designed with this feature in mind.
Privacy is not a crime in itself. However, it cannot be denied that it is a characteristic that is particularly appreciated by individuals seeking to commit crimes.
As the crypto industry grows, governments will seek more aggressively to regulate the sector and decrease the ability of criminals to commit illicit acts through cryptocurrencies, and precisely for that reason, the future of privacy cryptocurrencies and solutions such as Tornado Cash is particularly uncertain.
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