A common misconception of Bitcoins (or most cryptocurrencies for that matter) is that they are anonymous. However, this is not the case.
In fact, even Bitcoin.org themselves have clearly stated on their site that:
It is easy to see why Bitcoins are often mistaken to be anonymous as it is often advertised as an “anonymous digital currency” and made infamous as a criminal’s currency of choice on Silk Road, the world’s largest online illegal marketplace.
To learn why cryptocurrencies like Bitcoin are not fully anonymous, we must first learn the basics of how these transactions work.
When sending/receiving Bitcoins, you need a Bitcoin address, a single-use token containing a string of random numbers and letters which looks like this:
You would send Bitcoins to another person’s Bitcoin address the same way you would send an email to someone’s email address.
Because Bitcoin is decentralized and people exchange value without intermediaries, every transaction is always recorded on a public record for all to see. This online ledger is known as the blockchain.
ANYTHING DIGITAL LEAVES A TRAIL
Bitcoins are pseudonymous, not anonymous. Much like book authors writing under pseudonyms, pseudonym addresses used when transferring cryptocurrencies are the same. If the real identity of the author was interconnected to their pseudonym, all their works which were written under the pseudonym has now been associated with their true identity.
Similarly, all transactions with Bitcoin using your pseudonymous address is stored forever in the blockchain. Thus, if this address is ever linked directly to you, the whole world will know every transaction you have ever made.
Cryptocurrencies are electronic cash. And like anything digital, it is bound to leave a trail. Bitcoins use electronic wallets that send digital cash directly to one another. Some might argue that you do not need your real name/identity to perform anonymous transactions, just the Bitcoin wallet address.
However! This only applies if you can keep your Bitcoin wallet address secret.
Users can have many different Bitcoin addresses and a unique address should be used for each transaction.
THE ARREST OF ROSS ULBRICHT, ALLEGED CREATOR OF SILK ROAD
Bitcoins can be pretty easy to trace since every transaction between pseudonymous addresses is publicly recorded. This was one of the ways which eventually led to the capture of Ross Ulbricht (operating under the pseudonym ‘Dread Pirate Roberts’), the man convicted of running the Silk Road online drug marketplace.
Ross Ulbricht, alleged creator of Silk Road (Photo source: Motherboard)
(Photo source: The Guardian)
When Ulbricht was arrested in a San Francisco public library back in 2013, Ulbricht’s personal laptop held the key to all answers.
FBI agent, Ilhwan Yum, cross-referenced Bitcoin wallet addresses found in the Silk Road website's computer servers in Iceland and Ulbricht's confiscated laptop to the Bitcoin blockchain and he was able to identify Ulbricht’s wallet.
Agent Yum even noted that the “publicly available blockchain records made it even easier to figure out than if a criminal had used a legitimate bank”.
STORES CAN LINK YOUR IDENTITY
There are various techniques one may adopt to increase their anonymity when dealing with cryptocurrencies. These may include performing multi-input transactions, maintaining multiple wallets, utilising mixing services to trade out Bitcoins or using web-hosted 'eWallets' to mask the original owners.
However, these efforts would amount to little if the stores and retailers you are liaising with are linking your identity to your Bitcoin address. What’s more, this not only applies to online stores but the payment processors which the retailers are using who can link your identity.
For instance, if you are paying Bitcoins to your online retailer which may be taking your customer identity information, you are already allowing them to link that identity to your blockchain pseudonym.
Since users usually have to reveal their identity in order to receive services or goods when paying online, cryptocurrencies will never remain fully anonymous.
Take Hungry.dk for example. Their service provides takeout delivery ordered online and accepts payment in the form of Bitcoins. In this case, they would be linking the physical delivery address expecting the food with the specific Bitcoin address they received payment from.
CRYPTOCURRENCIES DO NOT ENCRYPT TRAFFIC
Under the Bitcoin protocol, when you send coins, the transaction is posted to Bitcoin's nodes unencrypted and in plain sight. Similarly communication between nodes is also unencrypted. Even anonymity cryptocurrencies such as Dash, Monero, Zcash and Zcoin have yet to implement encrypted node traffic. Anyone monitoring the network such as ISPs can obtain information on where transactions and blocks originate and can link Bitcoin addresses to IP addresses, which can be used to de-anonymize users.
PROTECT YOUR PRIVACY WHEN USING CRYPTOCURRENCIES
A VPN (virtual private network) like BolehVPN can protect your privacy when using cryptocurrencies by:
- Encrypting all outgoing traffic from your computer while you are doing your financial transactions.
- Prevent ISPs, governments or the NSA from looking into your wallet/node traffic and determining your transactions or even wallet balances.
- Allow you to purchase products anonymously (including VPNs) using cryptocurrencies while not revealing your true IP address.
- With our proxied server configurations, you can selectively choose to route only your wallet traffic through the VPN without affecting your other internet activities.
Bitcoin + VPNs should always come hand-in-hand. Read Why You Should Pay For Your VPN in Bitcoin.