It would be inaccurate to call Bitcoin entirely anonymous when in reality it is pseudonymous. Bitcoin is considered pseudonymous as each user does have a public address that can possibly be traced back to their IP address or an exchange account (and thus their identity) using an effective network analysis technique.
“So, instead of wondering whether Bitcoin is anonymous or not, the real question to ask is how anonymous is Bitcoin?” says Scott Jason Cooper.
Bitcoin value is anonymous in the sense that all of its components, like the private and public keys, transactions and addresses are all stored in text strings. Therefore, there is no direct way to link these pieces of data to anybody’s personal identity.
Since a general understanding of blockchain technology was lacking in Bitcoin’s early days of use, people commonly thought it would serve as a haven for all sorts of criminal transactions and terrorist groups. This was due to it being untraceable and thought to be ‘entirely anonymous’. Fortunately, in recent years, people have started understanding blockchain technology better and it has become apparent that Bitcoin’s public ledger can be used by the authorities as a gold mine of valuable information. After all, any transaction conducted through Bitcoin is permanently stored in the immutable ledger.
Scott Jason Cooper Explains Broadcasting on the Bitcoin Blockchain
Every single bitcoin transaction conducted is recorded and broadcasted publicly on the Bitcoin blockchain. Since all transactions are public and permanent, you can think of it as a massive map created with time, allowing analytic tools to paint a complete picture of where exactly bitcoins are going.
While Bitcoin addresses are technically anonymous, an address could somehow still be linked to a person’s identity and Bitcoin doesn’t offer any privacy under such circumstances. There are many ways to connect these addresses to real-world identities, for example using KYC/AML policies at exchanges.
There are a few privacy tools means to enhance your security while undergoing Bitcoin transactions, but they aren’t perfect and allow room for error. So, unless you are proficient in what you’re doing, it is best to assume that you have little to no privacy or anonymity.
The Solution – Bitcoin Mixers
A Bitcoin mixer is your solution to preserve your privacy and prevent addresses from being tracked back to you. As the name suggests, mixers allow users to mix or merge their coins with other users’ coins to prevent breaches in security and keep their identity anonymous in case of a leak.
Bitcoin addresses should be considered pseudonymous, but if you have identified yourself at an exchange and you withdraw Bitcoin from it, the exchange knows your Bitcoin address and thus can reveal your identity. The next time you move coins from this address, you risk revealing your personal information, how many coins you own, and even what you spend your money on.
By choosing to mix your coins, you obscure ties between your Bitcoin address and your real-world identity. This will allow you to maintain anonymity while you move your coins.
How Do Mixers Work
There have been many mixing techniques developed and proposed over the past few years. These range from completely centralized solutions where all Bitcoin users trust a single mixer, to individual solutions where the users don’t need to essentially trust anyone. Some mixers imitate a Lightning Network-style payment route and ones that use privacy coins as an intermediary step.
Instead of overwhelming you with information regarding all of these mixers, we have instead chosen the top two. Let’s dive deep into how these mixers work.
This service accepts your Bitcoin payments and sends you different coins in exchange. When many different people use this mixing service, it becomes nearly impossible for outsiders to tie incoming coins to outgoing coins. By breaking the transaction trail in this way, centralized mixers offer you a high level of privacy to conduct your Bitcoin activities.
However, these mixers do have some unresolved problems. Firstly, users need to be able to trust their mixers to maintain privacy as they know exactly which user is sending and receiving which coins. Secondly, mixers could take incoming coins and refuse to make the return payment. Without a regulatory body, it can be difficult to place your trust in a mixer to maintain your privacy and return your coins.
Chaumian CoinJoin Mixers
Next, we have Chaumian coinJoin mixers which solve both the problems that arise with centralized mixers. Chaumian CoinJoin mixers let big groups of users cooperate to make one large payment to themselves. So, if a hundred users send 0.1 BTC to a new address (which they control) and then merge all of these hundred transactions into one large transaction, everyone involved gets 0.1 BTC back and nobody can trace where it came from.
Additionally, Chaumian CoinJoin mixers are designed that even the merging entity can’t pinpoint which coins went to what address. They also can’t steal any user’s coins as the user could simply refuse to sign the merged transaction if they haven’t gotten their BTC back yet.
Some Popular Mixers
Due to the problems that arise with centralized mixers, we recommend you opt for Chaumian CoinJoin mixers instead. Here are some popular mixers for you to try out.
- Wasabi Wallet
- Samourai wallet
There is an alternative if you would rather not use these Chaumian CoinJoin mixers. JoinMarket is another way to mix coins. It allows Bitcoin investors to merge their transactions to bigger ones using CoinJoin, while also obfuscating their trail of coins for extra privacy. Since these merges are financially incentivized, users often prefer JoinMarket to mix their coins.
At the End
Since Bitcoin blockchain is basically a transparent, open ledger, it means that every payment conducted using it can be publicly visible. It is the future of cryptocurrency. To add to this, the way Bitcoin transactions are done, recorded, and stored often reveals user information as well. Most noticeable are transactions with numerous ‘inputs’ (done through chunks of coin). These suggest that all of the inputs made are from the same user, allowing address clustering which makes room for a huge privacy leak. Blockchain analysis will help you better understand such privacy leaks and use this information to analyze the Bitcoin blockchain itself.