Are Bitcoin Transactions Anonymous?

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Is Bitcoin Anonymous?
You’ve probably read that Bitcoin is going to be the end of the world. You’ve heard on the news that Bitcoin allows for networks of drug dealers and terrorists to send money anonymously over the internet, and there’s no way to stop them! So, Bitcoin is anonymous, right? In reality, that statement could not be more wrong!

The beauty of Bitcoin is that all transactions are stored publicly and permanently on the network. This allows any user to to see the balance and transactions of any Bitcoin address. Bitcoin is built on the fundamental principle that users, not governments or banks, should have the power to validate the network and settle transactions.

So, can anyone search the blockchain and determine how you’re spending your Bitcoin? Yes and no. If you look up a Bitcoin transaction, you’ll see information on the sender, recipient, and value. However, the parties involved are identified only by their public wallet addresses. Below is a transaction from a recent block, #490856.

If you’d like to see this transaction yourself, just head over to a blockchain explorer and type in the transaction ID, one of the addresses, or the block number. In this snapshot, you can see that a total of .422 BTC was sent from two addresses to a single address. You can also see the timestamp of the transaction and the block that the transaction was included in.

One key takeaway is that the transaction itself contains no Personally Identifiable Information (PII). Unlike a credit card transaction which reveals your name, card number, and security code; a Bitcoin transaction reveals nothing about you. However, this does not mean that transactions are anonymous. Companies and governments are starting to pour resources into so-called “Chain Analysis” which is intended to unmask Bitcoin users.

If you purchased your Bitcoin recently through a US-based exchange, you’ve made the job of chain analysis a lot easier. Why? Because most exchanges are compliant with the United States Know Your Customer (KYC) and Anti-Money Laundering (AML) laws. This means you had to provide your name, address, ID, and possibly Social Security Number to buy Bitcoin. Now, most exchanges are trying to be good stewards of their customer’s privacy, but it is not far-fetched to think that the various agencies in the US government will one day obtain your account information from exchanges, including your wallet addresses. Once your ID is linked to an address, it is trivial to track your funds as they are moved to various wallets.

Reactor - A Product of Chainalysis

Anonymity cannot be guaranteed. However, if you mined your Bitcoin or bought them with cash through a service like Local Bitcoins, then your identity was not linked to your acquisition of Bitcoin. However, companies like chainalysis are constantly monitoring activity and looking for trends. Also, eventually you’ll want to spend your Bitcoin or maybe convert to cash, at which point you face the dilemma of getting products or cash without unmasking your identity. If you’re not a savvy user, it’s best to assume that you’re not acting anonymously when using the Bitcoin network.

Protecting Your Bitcoin Privacy

Don’t lose hope just yet. There are some best practices that you can follow to help maintain your privacy. Most wallet services allow for the creation of millions of bitcoin addresses. This means that you can use a different address for each transaction. You can also use Virtual Private Network (VPN) services and The Onion Router (TOR) to protect the identity of your PC. VPN’s and TOR help prevent your computer’s IP from being logged.

In addition, there are Bitcoin “mixing” or “tumbling” services that can be used to help obfuscate transactions. It is important to determine if these services are legal in your jurisdiction. Using such a service also requires trust in the service provider, as they route your Bitcoin through addresses that you do not own.

As Bitcoin matures, many applications are being built on top of the Bitcoin network. In the near future, it may be possible to send transactions over the lightning network, a sidechain which makes the job of transaction tracing much more difficult. However, if privacy is your main concern, you may want to check out some privacy based cryptocurrency alternatives.

Privacy Alternatives

Monero

As an alternative to Bitcoin, there are several cryptocurrencies that are built from the ground up with privacy in mind. The biggest player in privacy-oriented crytocurrencies is Monero. Amazingly, Monero also uses a public blockchain and distributed consensus to verify transactions. The key difference is in the transactions themselves. Monero uses ring signatures and ring confidential transactions to obfuscate the amounts, origins and destinations of all transactions.

Ring signatures are a powerful application in cryptography. A ring signature is a type of digital signature that can be performed by any member of a group of users to create a transaction. However, to an outside observer is is impossible to determine which member of the group actually made the transaction.

There are many other cryptocurrencies vying to be the “anonymous Bitcoin”. Other examples include: Zcash, DASH, PIVX, and Verge. Some of these currencies require that all transactions are anonymous while others allow for optional private send. When choosing a privacy-based currency, it is important to do your homework. Many users will only trust a currency that is fully open-source. Many projects are actively reviewed by developers and tested to ensure privacy. If a cryptocurrency does not release their source code, the privacy of that currency can be called into question.

Conclusion

Unlike cash transactions, every transaction on the Bitcoin network is public knowledge. Bitcoin was designed to allow for transfer of value without unmasking users, but as exchanges become compliant with the laws of their local Governments, anonymous transactions will become harder to perform over time. So, pay your taxes and stay out of trouble!