The Reality of Bitcoin Privacy

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gingerbreadfork
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5 min read

There is a stark contrast between total anonymity and the type of privacy you can get when using bitcoin.

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While you may hear in the media claims that bitcoin is a favorite tool of criminals, the reality is actually quite different. There is a stark contrast between total anonymity and the type of privacy you can get when using bitcoin and most other cryptocurrencies.

Is Bitcoin Anonymous?

Unlike what you have heard, bitcoin is not by nature anonymous; it is, in fact, pseudo-anonymous. While this is a common misconception, the difference between being totally anonymous and pseudo-anonymous is somewhat niche at first thought.

Firstly, bitcoin utilizes a public blockchain. When transactions are performed on a public blockchain, they are visible for anyone with access to the network to see and track. Thus, if you open any active address in a bitcoin explorer, you will be able to see any movements in and out of the wallet that has occurred and other metrics such as the current and historical balances of that address. For example, suppose you were to use a wallet on an exchange that requires KYC or to purchase goods and services from a business with some of your information. In that case, you are at risk of being connected to that address and can be reasonably assumed to have performed any previous or future activity associated with that wallet.

Even though anyone can create a bitcoin wallet (even a machine could if programmed to do so), if you were to use a wallet actively, you are almost always at some risk of exposing your identity somewhere along the line. The primary thing that can expose you as the owner of a wallet address is when you are using an on-ramp to convert your local currency or other assets into bitcoin, as this is the most likely time where you will have to provide your details. If you were to mine some bitcoin and then only ever send that to addresses with no context or connection to who you were, you might not have to worry much though this is not the reality for most bitcoin users.

While some people opt to use bitcoin mixers to break the chain of history associated with specific coins, this behavior is starting to draw attention. However, mixing can raise red flags when using centralized exchanges, especially if you use them to cash out. Another problem with bitcoin mixing is that trust will typically need to be considered when considering using a mixing service.

How Can Bitcoin Protect Your Privacy?

While in a technical sense maintaining total privacy using bitcoin is a bit of a misnomer, it is possible to maintain a standard of anonymity and privacy that is good enough for most people provided you place a little care in how you buy, sell, and otherwise trade your bitcoin.

For those bitcoin users in sensitive regions, it has become an incredible tool for remittances, in large part thanks to the global P2P trading movement that provides liquidity and access to people and areas that otherwise would struggle to leverage modern tools like bitcoin for a range of reasons. As a result, bitcoin removes roadblocks to exchanging value freely while giving back a lot of the lost freedom when using traditional financial systems like banks.

If you are in a delicate situation, bitcoin gives you the power to move funds around the world in minutes with minimal expense or even to carry value across borders while carrying nothing at all simply by memorizing your seed words or private key.

What privacy means to each of us can vary. Still, for those in parts of the world that are struggling economically or politically, the discretion that can be found when using bitcoin can be an extremely beneficial thing to protecting yourself and any value you may have from hyperinflation, seizure, or prying eyes. Even with the pseudo-anonymity of bitcoin not being genuinely anonymous, a lot can be achieved. This is something you will see simply by looking at the parts of the world rapidly taking to bitcoin even while struggling with various oversights and restrictions.

Certain Bitcoin Transaction Can Impact Privacy More

Depending on how you transact on the bitcoin network, some types of transactions can affect your privacy more than others. One of those transaction types is multi-input transactions. As we've already touched on, the bitcoin blockchain is public, and how anonymous bitcoin is in your case comes down to how you choose to use the network and the transactions you make. So, suppose you are performing more advanced transactions with multiple inputs from addresses you control. In that case, this can result in all the included addresses being associated with your person if even one of the others used are connected to you at some point.

Another area where privacy can be compromised is when using multi-signature wallets. When dealing with multi-sig wallets, each transaction that occurs publishes the logic controlling the wallet for all to see; this is being addressed with the bitcoin taproot upgrade, which is an interesting topic in itself, especially if you are interested in bitcoin privacy for more advanced use cases.

Ways to Improve Your Privacy When Using Bitcoin

  • Avoid using the same addresses heavily
  • Use the lightning network
  • Operate your own full node
  • Use a VPN or TOR

Why Bitcoin is a Bad Choice for Criminals

As the bitcoin blockchain is public and coins can be easily monitored, using bitcoin as a tool to commit crime is not just a poor choice; it’s quite an absurd one in many cases. Over time large centralized exchanges have been exposed to hacks that have sadly resulted in a loss of funds, although these funds often end up stuck and challenging to spend. Bitcoin gained as the results of a hack, ransomware attack, or similar crimes are easily flagged as tainted and can quickly be seized when deposited into centralized exchanges when attempting to cash out. It does you little good to have millions of dollars in bitcoin when moving them anywhere to cash out would quickly raise alarms. On the other hand, cash is relatively fungible, so in most cases, one pile of money is equal to another, and while it becomes more difficult at scale to spend or use when it comes to crime, cash is and will likely remain the mainstay.

Why Privacy is a Valid Concern

Unfortunately, when the topic of privacy comes up, many people will simply imply that if you aren't doing anything wrong, you don't have anything to be concerned about. However, things are rarely quite so simple, and in reality, the dangers of being careless with your financial privacy are far more nuanced.

In some parts of the world, having much money at all can put you at risk in your community; it’s not hard to see how privacy is an important consideration in that sense, in some extreme cases, you may be at risk when it comes to dealing with your own government. But, unfortunately, it’s easy to forget that not everyone is in the same position. When we all take privacy less seriously, everyone suffers as it becomes far less practical to maintain privacy the more isolated you are in doing so.

Bitcoin allows you the power to be your own bank, to access the global economy, the freedom to exchange in ways that suit your needs and on your terms, and with a bit of care, you can do so with a reasonable degree of privacy as well.

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