The Bitcoiner’s Checklist For Transaction Privacy
While Bitcoin can support strong privacy, it was not designed to be entirely private. If we analyze the Bitcoin network to its core, we will find out it’s probably the most transparent network in the world.
All transactions are public, traceable, and permanently stored on the blockchain. As a wallet user, you privately receive an address that allows you to receive Bitcoin. Since each Bitcoin address stores a log of every other address it has transacted with, the newly created address will eventually get linked to a transfer, leaving an immutable digital footprint.
Pseudonymity — a word derived from pseudonym, meaning «false name» — is a state of disguised identity.
In layman’s terms, the digits of a Bitcoin address are a pseudonym. This makes it possible to send and receive BTC without giving any personally identifying information. In reality, however, we are almost always required to identify ourselves in order to trade on cryptocurrency exchanges or receive goods & services.
Under these circumstances, it’s very hard to remain 100% anonymous on the Bitcoin Network (unless you have the technical know-how to use it with other anonymizing technologies like Tor or i2p). On the good side, there are ways of improving the privacy of the transactions. And once you get started, it will gradually become second nature.
We have even put together an easy-to-remember checklist ✅
#1 — Always use new addresses to receive payments
If you use the same address each time you receive funds, it becomes easy for anyone to track your entire payment history. This method of address generation improves privacy by automatically presenting you with a new address when you’re expecting payment.
As an additional firewall, a new key pair should be used for each transaction to keep them from being linked to a common owner. — Satoshi Nakamoto
As Satoshi himself mentioned, some linking is still unavoidable, especially when doing many Bitcoin transactions. A common practice employed by transacting parties is to use several wallets with assigned roles. Doing so allows you to isolate each of your transactions in a way that is not possible to associate them all together.
Wallet providers will usually create a new address for users to receive payments, so don’t panic if your receive address has changed, you have already taken the first step to protect your assets.
#2 — Keep your IP address undercover
The temptation — as well as the danger — is to use the same device for accessing our Bitcoin wallet, Email, Tinder and social media accounts. Altogether these services leave a digital footprint named IP.
Your IP address can be used to determine lots of personal information, including your real location and physical address. Of course, when combined with other sources such as a computer, browser type, metadata, web history, and social media information, the profile created can be incredibly detailed and accurate.
Unless we do something about it
It’s always a good idea to use a virtual private network (VPN) that encrypts all of your Internet traffic and routes it through multiple servers. The VPN would change IPs at different locations making it difficult to pinpoint a real identity.
Be careful when choosing a VPN provider. Just like you wouldn’t trust a stranger with your credit card number, it’s safe to assume “free stuff” is a ruse.
Pro Tip: When buying a VPN with cryptocurrency, it’s a good idea to use a separate email that doesn’t include sensitive personal information.
Below you can take a quick look at some of the top VPNs picks:
- ExpressVPN — No email address required. Numerous super-fast servers in over 90 countries. It also works great in China and throughout the Middle East.
- PrivateVPN — Direct Bitcoin payments accepted. Unblocks geo-restricted content from vast countries.
- NordVPN — Best budget/value ratio. Keep no logs of browsing activities. Vast server network.
- Microleaves — Direct Bitcoin payments accepted. Offers reliable dedicated proxy servers. Scores top marks at security levels.
#3 — Mixing Services
Bitcoin tumbling, also referred to as Bitcoin mixing, is the process of using a third-party service to obfuscate the ties between Bitcoin addresses and real-world identities. For this reason, crypto exchange hackers use such services to launder millions worth of Bitcoin every year.
In spite of the way mixing services are perceived, wealthy bitcoiners may not want to reveal their holdings as it would make them a sure target. There are countless reasons why people want privacy, and the market is ready to deliver.
According to Chainalysis, only a small percentage of coins sent to and from bitcoin mixers are used for illegal activities — 8.1% of all mixed coins were stolen, while a modest 2.7% had been used on darknet markets.
What are some popular mixers?
Several mixing strategies have been developed over the years. Most solutions available today are both centralized mixers, as well as decentralized.
In the centralized bitcoin mixing model, the service matches different wallet addresses with different amounts and sends random amounts of bitcoins to each address until before sending the correct balance to each address. Users may also receive funds from the reserve funds of the mixing service.
Two of the most popular centralized mixers are smartmix.io, smartmixer.io
Decentralized mixing is an attempt to fix the disadvantages of the centralized model with protocols such as TumbleBit and CoinJoin. Some of the most popular decentralized mixing services are:
Wasabi Wallet — Has a CoinJoin mixer built-in. While Wasabi Wallet is technically centralized, the operator cannot de-anonymize users nor steal any funds. It also offers a user-friendly interface to help users distinguish between mixed coins and non-mixed coins.
Samourai Wallet — Also offers a CoinJoin mixing service, called Whirlpool. Available on mobile. However, to really use the privacy feature to its full extent, users do need to connect their wallet to their own full Bitcoin node.
JoinMarket — JoinMarket allows users to merge transactions into bigger transactions through CoinJoin. An interesting feature of JoinMarket is that participants are financially incentivized to offer their coins to be mixed.
What is the real promise of Bitcoin privacy?
Given the authorities struggle to close the darknet markets, there is a growing demand for maintaining privacy services on the Bitcoin network. At the other end, research is being done to add layers of privacy and to encourage mass adoption.
By design, the Bitcoin network places responsibility in the hands of the user, which greatly reduces the benefit from legal protection.
Over the years we can expect safer, user-friendly interfaces, as well as gradual tampering of hacking devices. Until Bitcoin reaches its pinnacle, forewarned is forearmed.
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