One major advantage that cryptocurrencies are said to have is anonymity. However, all transactions leave traces – even with the number one cryptocurrency, Bitcoin. How anonymous is Bitcoin really?
That’s exactly what we want to answer here, along with some other details that may open your eyes to the cryptocurrency universe.
“Know-Your-Customer” Principles Are “Single Point of Failure”
Those who trade cryptocurrencies often want to remain anonymous. Especially those who got in early and invested in Bitcoins at an early hour, for example, and now have a large fortune, have an interest in ensuring that no one in the crypto world knows about their fortune and true identity.
Because otherwise that investor could easily be exposed to phishing attacks or hacks. But with Bitcoin in particular, anonymity is such a thing: It seems that it is only possible to trade Bitcoin completely anonymously in exceptional cases.
The reason for this is the “Know-Your-Customer” principles that crypto exchanges where you can trade the Bitcoin contain. Anyone who registers there often has to do so with a clear name and proof of identity.
It is true that this information is actually only intended as a safeguard for the crypto exchange itself. But they represent a so-called “single point of failure”: This is because it could be used to draw a connection between the Bitcoin address and the trader’s clear name with enough effort after the fact.
Acquire Bitcoin with Cash or Mine it Yourself and Bet on Block Rewards
Probably the only way to protect yourself is to acquire Bitcoin with cash and then use a crypto trading bot for HitBTC to maximize the investment. However, that is hardly possible anymore, because there are hardly any crypto exchanges where trading with cash is possible.
Those who mine Bitcoins themselves receive a reward in the form of Bitcoins for each block. Currently, there are still roughly around 2 million Bitcoins to be mined, although it’s reaching the 21 million limit.
However, the effort for mining is large: Bitcoin miners have to spend a lot of computing power to mine Bitcoin. That costs a lot of electricity, and the lower the block reward gets – and the higher the price of electricity – the less profitable mining becomes.
Full Nodes & CoinJoins
Another way to trade Bitcoins more anonymously is to run your own full node. This allows a separate wallet to be set up to store the digital coins, which does not link personal data such as address or transactions to the respective owner of the wallet.
On top of that, Bitcoin fans who want to remain anonymous can use so-called CoinJoins. This involves several people joining forces for their transactions. The individual transactions then help themselves to the pot of Bitcoins thrown together – so, it is no longer possible to trace which Bitcoins went out from which user in the end.
The more people join together for a CoinJoin, the more anonymous. The crux of the matter is that although it is not possible to trace the individual person in the transaction, it is possible to trace the group of participants.
Claim & Reality Diverge
Advocates of cryptocurrencies advertise decentralization in particular. One is no longer dependent on the classic banks including their financial policy decisions or dependent on them. That is basically true without a doubt.
Some automatically conclude from this decentralized mode of operation that it was also the top premise of the creators of cryptocurrencies to create maximum payment anonymity.
But far from it: Transparency and trust have always been fundamental requirements of cryptocurrencies. And transparency and anonymity do not exactly go hand in hand, as is well known.
Admittedly, the ultra-long number/letter combinations that one has to deal with in the playing field of cryptos in numerous ways give the impression of anonymity.
Anonymous & Pseudonymous | By No Means Synonymous
Anonymity means – broken down to its simplest form – that there is no possibility of tracing the real person. With a pseudonym, on the other hand, one adopts an “artificial name”, which makes identification more difficult. But it does not regularly make identification impossible.
To put it simply, the IP address that every user uses on the Internet is also a type of pseudonym. For the user, it may not be possible to identify him or her in real terms. However, for the provider or the investigating authorities, this can quickly look different.
With Bitcoin and other cryptocurrencies, it is now so that one also gets a kind of “IP address” assigned. From now on, you use just such an address (“wallet address”) to “log in” to the respective platform instead of your real name.
The wallet address – i.e. the above-mentioned sequence of numbers and letters – is now visible for every transaction. For everyone.
In accordance with the transparency requirement, anyone who wants to can view the so-called blockchain of the “pseudonym” and thus has a rough overview of all transactions that have already been carried out.
In this respect, the blockchain is to be understood as a kind of digital cash book that cannot be changed retrospectively under any circumstances.
Using a VPN to Conceal the IP Address
Internet browsers are also considered a security risk by privacy experts. For example, using IP addresses of the computers to search queries for Bitcoin addresses could be linked to the user and “in the worst case, link plain names with Bitcoin addresses.” The use of a VPN that disguises the IP address would help here.
All in all, it seems difficult to trade Bitcoin completely anonymously. Bitcoin fans should deal with how to protect their privacy early on. Because hacks and or attacks on crypto exchanges and wallets are not uncommon.