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How Anonymous Is Bitcoin?

The Bitcoin Blockchain documents every single Bitcoin transaction made since the first Bitcoin was mined more than 10 years ago. The blockchain allows the public to see, at any time, when Bitcoin has been sent, from what address and in what amount, and which address or addresses were the recipients. This means that the blockchain offers maximum transparency; as the addresses are cryptic sequences of letters and digits, the Bitcoin system is also anonymous. Provided that transactions can’t be connected to individuals, that is.

The cryptic designations for Bitcoin addresses ensure that the Bitcoin network remains anonymous. While the addresses are public, and remain public, nobody knows who is behind each address. At least, that is the case if no connections can be made between an address and its owner. As soon as an address can be attributed to an individual, it provides an overview of its payment flows and the network of contacts connected to it. But where are the interfaces between the Bitcoin blockchain and the analog world that enable these connections to be made?

A connection can be made between an individual and a Bitcoin address whenever Bitcoin is purchased officially via a crypto exchange. Such platforms require buyers and sellers to pass verification checks (KYC – know your customer) by providing personal data to identify themselves.

Bitcoin Available Off-Market

On the other hand, Bitcoin can also be purchased anonymously in OTC (over the counter) transactions. This term is given to transactions conducted directly between two parties, i.e. not via an exchange. There are also specialized platforms in which the operators usually serve as trustees. Such platforms don’t always require KYC checks, and instead allow users to enter a pseudonym and an email address. Another method of purchasing Bitcoin anonymously is to arrange transactions in special online chatrooms.

Bitcoin ATMs also allow users to purchase Bitcoin anonymously up to set limits. To do so, the ATM scans the QR code for the customer’s wallet before the customer enters the amount they wish to exchange. The amount in Bitcoin is then credited to their address. In most cases, however, these machines, which remain few and far between, charge steep fees for this service. According to coinatmradar.com, there are just under 5,000 such machines around the world, of which 30 are in Germany.

In principle, any Bitcoin you mine yourself will also be anonymous. Mining has long since developed into a global economic sector in its own right, with the work performed by highly efficient hardware at locations where energy supplies are cheap. It is now almost impossible for private individuals to mine Bitcoin efficiently. Connecting your own mining hardware to a pool, just like buying hashrate, usually meaning having to disclose your identity to your business partners. 

Transactions Create Connections Between Addresses

If you want to protect your own privacy as best as possible, you’d be well advised to hold multiple wallets and use a new address for every transaction, even if these transactions create connections between the addresses.

If you want to avoid this, you can also anonymize your transactions. To do so, you would transfer your Bitcoin to another account and then use a so-called mixing service. The desired amount of Bitcoin is sent to the platform along with the desired recipient address. The service then collects numerous orders at the same address, creating a pool. From there, the mixing service executes the requested transactions. As Bitcoins flow into the pool from various addresses and are used to make numerous different transactions, it becomes impossible to trace the original connection between two distinct addresses.

These mixing services are subject to respective countries’ legal regulations and constitute something of a legal gray area. Internet service providers are also in a position to track their customers’ Bitcoin transactions. To avoid this, web users need to anonymize their activities by encrypting their IP address using the Tor network or other services.

Only Cash Is Certainly Anonymous

It is, therefore, still possible to use the Bitcoin network with a high degree of anonymity. The more a person wants to cover the tracks, the greater the effort and costs required; due to growing regulation of cryptocurrencies, the ways of protecting anonymity are becoming increasingly limited. But, in any case, there is no way to be 100% certain that a transaction will not be traceable.

As all transactions are recorded in perpetuity, the time factor plays a crucial role – and one that benefits investigative authorities. If they successfully connect a dubious address with an individual, they also gain an overview of their payment history and the network of contacts connected to that address. In an age when major national intelligence agencies use state-of-the-art technologies and sweeping administrative powers to monitor huge swaths of online communication, this scenario is not that improbable. As a result, people with something to hide would be better off sticking to cash.

References

@samurai007. (2018). User Report: How I got robbed with an OTC (Over The Counter) Trade. Retrieved June 6, 2019, from https://smartoptions.io/crypto-otc-robbery/

99 Bitcoins. (2019). Verwenden von Bitcoin anonym. Retrieved June 6, 2019, from https://99bitcoins.com/wissen-weitere-verwenden-von-bitcoin-anonym-de/

99 Bitcoins. (2019). Top Seven Ways Your Identity Can Be Linked to Your Bitcoin Address. Retrieved June 6, 2019, from https://99bitcoins.com/know-more-top-seven-ways-your-identity-can-be-linked-to-your-bitcoin-address/

Bitcoin Project. (2019). Schützen Sie Ihre Privatsphäre. Retrieved June 5, 2019, from https://bitcoin.org/de/schuetzen-sie-ihre-privatsphaere

Coin ATM Radar. (2019). Bitcoin ATMs by Country. Retrieved June 7, 2019, from https://coinatmradar.com/countries/

Coin Kurier Staff. (2019). Übersicht über alle Bitcoin Automaten (ATMs) in Deutschland. Retrieved from https://www.coinkurier.de/uebersicht-ueber-alle-bitcoin-automaten-atms-in-deutschland/

Kilic, K. (2018). Mit diesen 4 Schritten bleibt ihr im Bitcoin-Netzwerk anonym. Retrieved June 5, 2019, from https://www.gq-magazin.de/auto-technik/article/wer-diese-vier-schritte-befolgt-bleibt-im-bitcoin-netzwerk-anonym

Neumann, D. (2019). Bitcoin-Automaten in Deutschland: Ausbau schreitet voran. Retrieved June 7, 2019, from https://coin-update.de/bitcoin-automaten-in-deutschland-ausbau-schreitet-voran/

SmartMix. (2019). Welcome to SmartMix: Your fast and secure mixer for Bitcoin and Bitcoin Cash. Retrieved June 7, 2019, from https://smartmix.io/