Many people are asking, is bitcoin anonymous? Well, read on to find out…
The white paper that introduced Bitcoin in October 2008 titled Bitcoin: A Peer-to-Peer Electronic Cash System extolled the virtues of the coin and its ability to allow users to send, receive and transfer value without revealing private information and without a central bank as an intermediary. At the time of its release, sending or receiving payment using conventional methods was and still is a long process with several stages of customer identity verification.
The centralized nature of money back then did not appeal to many privacy-conscious individuals. The possibility, thus, to transact without leaving much of a trace was an irresistible premise, and one that many online entrepreneurs jumped at with glee.
This mad rush set the blockchain technology and the thousands of cryptocurrencies that are now in circulation on the path to fame.
But as it turns out, what the world knew about Bitcoin then was just half the story. Or, is the coin anonymous?
How Does Blockchain Work, and Is Bitcoin Anonymous?
To understand the privacy concerns about Bitcoin, it is important to first highlight how the blockchain works. Blockchain here refers to the technology that is the backbone of Bitcoin; The playing ground upon which this crypto coin plies their trade.
What is the Blockchain?
The blockchain is a decentralized ledger or simply, a record-keeping technique where the records are not in the custody of a single custodian. While this definition is too plain, it probably paints a vivid picture.
In the simplest crypto lingua, the blockchain is a series of records that are immutable, time-stamped, and managed by a network of computers that are not owned by and do not report to any single entity.
Each of the blocks of data in the record are linked to one another using cryptography.
The Immutable Record of Information
In the very layman’s lingo, the blockchain looks a lot like a record of information where everyone is welcome to make new entries, and a community of users decide on how the information recorded is amended and updated.
From the definition above, two things stand out; the records are time-stamped and immutable, and they are not in the custody of any one person. However, these two are the covert aspects of the Bitcoin Blockchain. The more overt aspect is that the records, time-stamped as they are, are accessible to the public. Meaning, anyone can pull and view the records whenever he or she wants to.
It, therefore, follows by the description given here above, that Bitcoin is not anonymous simply because you can use it transfer value without revealing your identity. The records of transaction, pseudonymous as they are, can lead to your real identity.
How Does the Blockchain Work?
As stated here above, the blockchain has been likened to many conventional records you know, albeit with certain add-ons. However, it closely mirrors a spreadsheet, and one that has thousands of duplicates that are spread across all the computers in the network. Now, imagine that this spreadsheet regularly updating every time a transaction is created and validated.
The statement above implies that the information on the blockchain is shared, and is updated continually. This open feature presents one straightforward advantage; the database is not limited to a single geographic or digital location. The records, as such, are genuinely public and can be accessed summoned.
Since Bitcoin the cryptocurrency is supported by the architecture of this Bitcoin, the blockchain, it follows then that the currency cannot be concealed or be anonymous in a network that is otherwise public.
The Vulnerabilities of Using Bitcoin
Bitcoin, and other cryptocurrencies for that matter, are gaining popularity because of the ease of use and reduced cost of transaction. However, using cryptocurrency to send, receive, or transfer value comes with a great privacy cost, especially now that reclusion is a premium.
As I have pointed here above, the information recorded on the blockchain when a transaction is complete, remains public and, as such, available to anyone that wants to take a look. Every transaction you complete, each Satoshi you send, and every value you receive can be traced. Worse still, your address is only a pseudonym, which can lead to your real identity with just the concise enquiry.
Some instances where using Bitcoin can leave you vulnerable include:
If you choose to pay using Bitcoin, for instance, the address you use may guide the recipient back into your wallet. Using the address, the recipient can check the status of your Bitcoin wallet, scrutinize past transactions and even keep watch of your future dealings.
If the coins in your wallet can arouse awe, then your address alone is enough to give you away.
With the advances made in FinTech and the potential that cryptocurrencies have shown, an increasing number of people now prefer to keep their riches in the form of Bitcoin and other altcoins.
Governments all over have since gotten a whiff of this and are probing cryptocurrency transactions in a bid to broaden the bracket of taxation.
Some of these taxes and fees are justified. Most, however, are not rationalized because even the said governments have not finalized the policies that define the rules of engagement. At this point, thus, it is okay to let the government in on your cryptocurrency dealings. However, such disclosure need to happen only on a need-to-know basis.
Aside from the two cases identified here above, also consider risks from friends that have your cryptocurrency information, online shops where you make purchases, associates who you send and receive cryptocurrency from, and criminals. All these individuals can connect a cryptocurrency with the owner.
These situations described here are all dire. They make cryptocurrency mixing not just a preserve of the privacy-cautious people, but also for everyone transacting in cryptocurrency space.
How Can You Protect Yourself?
Cryptocurrency enthusiasts and practitioners in the space recommend a raft of measures. These include creating a fresh cryptocurrency address every time you transact, having an obscurity layer like TOR when transacting, and clouding your IP address through other conventional means.
While all these measures may help, cryptocurrency mixing still is the marque recommendation. To be on the safe side, if you have a stash of crypto, ensure you store them in a discreet wallet and only after you have mixed them. Also, if you have an online purchase to accomplish, do so via a cryptocurrency mixer. Lastly, ensure the coins you send or receive pass through a mixer before getting to you.
As crypto becomes mainstream, many people want to have a piece of it. A good number of these, such as criminals, will use sharp practice to defraud genuine holders of their coins. With the information that Bitcoin is not anonymous becoming general knowledge, a lot many people now know how to steal the cryptocurrency from other people’s wallets. Ensure you exercise caution so that you are not a victim of theft.