Cryptocurrency, and Bitcoin in particular, has a reputation for being a completely anonymous form of payment, free from tracking and interference. However, if you look a little closer, you will see that these digital currencies reveal a lot more information about you than you might think.
Anonymous vs Pseudonymous
The main problem with Bitcoin is its wallet, where your Bitcoin is stored. Cryptocurrency wallets are usually pseudonym rather than anonymous. Anonymity is being “nameless” – it comes from the Greek word for “nameless” – but instead your wallet gives you a fake name, a pseudonym. Instead of “Mark Twain” you get scrambled numbers and letters, but the idea is the same.
Although the Bitcoin Project itself discloses this information on his website, many people have taken the scrambled nature of their wallet addresses to mean that payments cannot be tracked. That’s the purpose behind using a fake name, after all. But your bitcoin wallet address can be followed, and quite simply too: it’s there, in the way the system is set up.
Blockchain and anonymity
Bitcoin runs on a blockchain, which for our purposes is a list of when Bitcoin came into being, where it was used, and by whom. (It’s actually a bit more complicated than that. Read our article on how blockchain works for all the details.)
SoonWhat is a “Blockchain”?
This list, also called register, is public. Everyone can see which wallet spent which bitcoin where. Although the person who spent the money is hidden behind a bunch of scrambled numbers and letters (an example is “vBMSEYstWetqTFn5Au4m4GFg7xJaN”, although this one is fake.), their activity is not.
For example, knowing that your friend John spent money on a specific service – a VPN, say – on a certain day, you can go to the ledger and see which bitcoin address spent money on that VPN on that day. that time. Even if this search spits out more than one or two addresses, you can check where else the money was spent. If one of the addresses you found has donated to Wikipedia like John regularly does, you have a second data point.
As with browser fingerprinting, it’s not a specific data point that gives you away. That’s the whole picture. With today’s technology, it’s also easy to put all those little pieces together, making pseudonymous accounts almost useless when it comes to protecting your identity.
Exchanges and Proof of Identity
There’s another problem, though: Spending is one thing, but buying Bitcoin isn’t anonymous either. Exchanges, where you exchange your government-backed currency for cryptocurrency, all require some sort of proof of identity, whether it’s a passport, driver’s license, or ID. government-issued ID. Just like regular banks, to operate, exchanges must implement know-your-customer (KYC) protocols.
This means asking for your ID (like here on the popular exchange site Coinbase) and maybe even for proof of income and such. As with the banks, they do it because they have to: Governments around the world are cracking down on money laundering, whatever the method.
Because the ledger is public, authorities can see who bought how much and when by simply requesting your information to be exchanged. If you think a fake ID can help you, you’ll also have a nasty surprise: you can also be identified by the bank account you used. This piece in Science explains in much more detail how authorities ensure that criminals cannot hide behind Bitcoin.
Anonymous cryptocurrency
There are ways to circumvent these guarantees, of course, but these are often quite technical or simply expensive, such as setting up a special protocol to hide the origin of your transfer or obtaining an intermediary who (paid) will buy the Bitcoin for you. Since the origins of the purchase are covered, you will have to go through different portfolios regularly. That should be enough to cover your tracks, at least partially.
Another option to get Bitcoin anonymously is to just mine it yourself, but that might not be profitable, according to the electricity price in your country: in Venezuela, it’s a great idea, while in Australia, it’s really not the case.
A final option is to simply buy Bitcoin with cash using a Bitcoin ATM: just as we discussed in our article on anonymously signing up for VPNs, cash is still king when it’s about protecting your identity. However, these ATMs are not free: they charge significant commissions, 7.5% on average, according to a source. These ATMs also require you to visit them with a big wad of cash in your pocket – a mugger’s dream – so that’s something to keep in mind too.
Anonymous alternatives to Bitcoin
That being said, there are options besides Bitcoin that you can use if you want to make anonymous online payments. Monero seems to be the most popular (other examples include Zcash and Hyphen), but all of them use some kind of technology to somehow hide the wallet address, which makes the coins much harder to trace.
Just like with Bitcoin, however, we doubt they will remain untraceable. The money is too big to move around without regulation, it seems, so we anticipate that eventually these still-anonymous coins will become traceable and people who seek privacy, for whatever reason, will have to move elsewhere.
