Bitcoin addresses, public keys and transactions are presented in encrypted text string formats, ensuring that there is no way to directly link the information to a person’s identity. But is Bitcoin anonymous enough for privacy-conscious individuals?
As the cryptocurrency market gained traction over the years, the digital currency was known to herald a change in the way we perceive money. Unlike fiat currencies, it is not possible to directly link cryptocurrency transactions to any particular user, since the information is encrypted in scrambled text. Because of its perceived anonymity, cryptocurrencies have gained its ground in darknet markets such as Silk Road as they felt cryptocurrencies like Bitcoin suitable for the illegal trade. However, it was not long before the assumption was debunked by experts, and governments.
Two years after the notorious rise in the darknet, Silk Road was eventually terminated by the FBI in 2013. Authorities later revealed in the 2015 investigative report, that they managed to track down Ross Ulbricht, the creator and owner of Silk Road, through the aid of free and publicly available blockchain explorers. The high-profile arrest may showcase the FBI's exceptional abilities to the world, but it has also exposed the ’flaw’ in the very design of Bitcoin.
Contrary to expectation, Bitcoin and most cryptocurrencies are essentially pseudonymous. Blockchain analytics firms such as CipherTrace, Elliptic and Chainalysis have shown us that it is possible for anyone with the required knowledge and skills to trace any transaction on the Bitcoin blockchain to an individual. Moreover, as cryptocurrency enthusiasts call for wider adoption of digital assets, it has prompted governments, regulators and financial institutions to enforce strict know-your-customer (KYC) and anti-money laundering (AML) regulation in the cryptocurrency industry.
While KYC and AML are seemingly implemented to establish users' confidence by regulating the cryptocurrency industry, they have inadvertently added a layer of bureaucracy that further infringes our ability to trade Bitcoin and other cryptocurrencies anonymously. After all, it was the decentralisation, or removal of intermediaries for our financial transactions, that has attracted many people into believing and investing in the new asset class.
Hence, it is now known that Bitcoin is in fact, pseudonymous. The level of your anonymity in Bitcoin transactions is largely dependent on how you use them.
It is Bitcoin anonymous issue that fails to protect its users
Back in the early days of Bitcoin, the overall public understanding of the novel blockchain technology was limited. Few have tried to venture deep into applying Bitcoin for real world transaction use cases. Therefore, the anonymous issue was overlooked by early adopters and Bitcoin was deemed as a safe haven for bad actors and criminals due to its perceived nature of untraceability and anonymity. As blockchain technology became more recognised by corporations and the public, it is evident today that Bitcoin’s public ledgers are able to provide a wealth of information for authorities investigative purposes.
But before we dismiss Bitcoin’s anonymity as a ‘scam’, Bitcoin does offer an acceptable level of ‘anonymity’ for its users transactions. Ironically though, the transparency and immutable Bitcoin blockchain has also allowed anyone to trace any Bitcoin transaction. Hence, Bitcoin could be interpreted as a pseudonymous network instead.
Apparently, Bitcoin is pseudonymous since each user’s public address could be used to trace back to an IP address or exchange account. Eventually, the actual identity can be discovered through proper blockchain analysis.
To put it simply, we have to acknowledge the fact that Bitcoin addresses and transaction records are indeed anonymous if one is to ensure that none of these information is shared with anyone else. But if an address can somehow be associated with a real-world identity, then it is safe to say that Bitcoin offers zero privacy.
So, is Bitcoin anonymous? Yes, it does since transactions records are recorded in encrypted text string format. But that is in no way helpful to protect the privacy of Bitcoin users.
Fortunately, there are a number of privacy-focused solutions that exist for Bitcoin users. The only bothersome part is the additional time required to execute a Bitcoin transaction. For those who value privacy over convenience, spending that extra few minutes in a Bitcoin transaction can be worthwhile after all.
Is Bitcoin anonymous with tumblers?
Bitcoin tumblers (or mixers) is one of the more commonly used methods to obscure one’s transaction from any existing blockchain analysis tools. These tumblers are online services that allow users to mix their Bitcoins with other users in the “mixing” pool so as to achieve maximum privacy, and anonymity.
Basically, these mixers act as a proxy for Bitcoin users to break their transaction records in case anyone tries to look up on the user’s transaction record via the blockchain explorer. In order to achieve complete anonymity, reliable Bitcoin tumblers like MyCryptoMixer offer its users to receive their mixed funds into five different receiving addresses. Thus, users are advised to come up with five different Bitcoin addresses that do not have any links with the original Bitcoin address so that mixed transactions will be even harder to trace.
When done correctly, techniques such as blockchain analysis will be unable to trace the user’s Bitcoin addresses to their real-world identities. The next time coins move from these addresses, users risk revealing all sorts of personal information. By using a tumbler, users can therefore use Bitcoin more privately, without the need to worry of Bitcoin’s anonymity issue.
How do Bitcoin tumblers work exactly?
Over the years, there are numerous mixing/tumbling strategies that were proposed and created, ranging from centralised solutions where users have to trust the mixing service provider, to trustless and decentralised solutions that resemble the Lightning Network payment process.
To give you a better perspective, we are going to go through a typical scenario of Bitcoin users who utilised centralised mixing service, which is more user-friendly for everyone:
An example involving a Bitcoin transaction between Adam and Ben
Adam (A), a privacy-conscious individual, is looking to pay Ben (B) for his service in Bitcoins. In order to receive the funds, B would provide his own Bitcoin address to A.
As A could not afford to risk his transaction records to be seen by B, he used a Bitcoin tumbler to send the required amount of Bitcoin to B instead. Should B ever tries to peek into A’s bitcoin address’s transaction details, he will fail to see any details as the address is a one-time Bitcoin address generated by the Bitcoin mixer. As a result, A has successfully prevented B from viewing his actual Bitcoin address, and the transactions records within his real address.
Through the above example, we can infer that Bitcoin tumblers could act as an effective tool to address the anonymity issue that Bitcoin is currently lacking, by obfuscating the transactions of the sender.
Centralised Bitcoin tumblers (Mixers)
As mentioned earlier, centralized Bitcoin tumblers are services provided by a trusted third-party that accept bitcoin payments and send different Bitcoins of the same amount. If many people use a particular tumbling service, it becomes increasingly difficult for an outsider to tie any of the Bitcoins from the sender’s address to the recipient’s address. This caused a break in the transaction trail, offering privacy to the sender. Centralised Bitcoin mixers managed to resolve the lack of anonymity in Bitcoin transactions.
However, users of Bitcoin tumblers may need to choose trusted tumblers like MyCryptoMixer as they do not store any logs for more than 24 hours like others did. For instance, some tumblers will know exactly the transaction activity of the user involved in its mixer, and without the automated clearance of logs, the service provider could trace the sender’s address. If the Bitcoin tumbler is willing to share this data with interested parties, it will be detrimental to the sender, who would lose his privacy at the end of the day.
Reliance of privacy tools to address anonymity issue
All in all, it is safe to assume the crucial role that privacy tools such as Bitcoin mixers are playing to protect the privacy interest of Bitcoin users. Until Bitcoin manages to have a protocol-level anonymity system in place, users who value privacy, or complete anonymity when dealing with Bitcoin may have to rely on several workarounds to reduce the probability of detection. Otherwise, any Bitcoin user without sufficient anonymity measures in place would be susceptible to a string of unnecessary troubles and privacy compromise.
Clearly, keeping anonymous with Bitcoin requires the user do come at a cost. But, it may not be wise to give everyone an opportunity to know where you spend your Bitcoins on, and how much bitcoin you own. So, apart from negligible service fees and additional time required to set up these privacy tools, it is worth the effort to do so. Thanks to existing privacy tools, there are still ways to remain anonymous no matter the number of regulations imposed in the cryptocurrency industry. By mixing your coins to protect your privacy, there are many reasons to protect your privacy. Is Bitcoin anonymous? Definitely not. But is there a way to keep your Bitcoin transactions anonymous? Certainly there is!
For more information on how to mix Bitcoins on trusted Bitcoin tumblers, do check out our useful guide “How to Mix Bitcoins?".