Back in 2012, the FBI published a now-infamous report on Bitcoin.
It called Bitcoin a “venue for individuals to generate, transfer, launder, and steal illicit funds with some anonymity.”
Not only did it stamp Bitcoin with an ‘unlawful’ reputation, it spread a huge misconception: that bitcoin is anonymous.
So let’s clear a few things up.
Bitcoin is definitely more private than a bank transaction. It cuts out the middleman and it’s difficult to link a transaction to your name.
But Bitcoin is not Anonymous…
It’s a small difference, but it has big implications.
Using bitcoin is like making a transaction with a pseudonym or a fake name.
Problem is, if someone can link you to that pseudonym, they can see every transaction you’ve ever made.
Here’s a real-life metaphor:
Harry Potter author J.K. Rowling famously published a novel in secret using the pseudonym Robert Galbraith. For a long time, she was effectively writing anonymously. But as soon as someone cracked the pseudonym, the novel was instantly linked to its real author.
She was only anonymous until someone pierced her pseudonym.
The same is true of Bitcoin.
How Bitcoin Works
To understand why, we need to get our head around how the cryptocurrency works.
Let’s say my friend wants to send me some bitcoin. I give her my “public address.” It’s a long scrambled mess of code that tells her where to send the cryptocurrency. It looks something like this:
So far, it seems pretty private, right? There are no names involved. No banks tracking who we are. That scrambled address is my pseudonym.
So my friend sends the money and the transaction is recorded on the Bitcoin blockchain.
The Blockchain Contains Every Bitcoin Transaction Ever Made
You can think of blockchain like a giant spreadsheet, except it can be accessed by anyone in the world.
Whenever a bitcoin transaction is made, it is recorded on the blockchain for all to see.
That transaction with my friend is now permanent and irreversible. It can’t be altered.
So What? It’s Just a Mess of Code, Right?
True. But let’s say I use that same bitcoin address to buy plane tickets online or donate to a charity.
Worse, let’s say I use it to do something illegal, like buy drugs.
That same scrambled address shows up again and again on the blockchain.
If someone knows my public address, they can search for it and see every bitcoin transaction I’ve ever made, how much was involved, and which other “public addresses” I’ve interacted with.
If someone knows my “pseudonym,” they can trace my activity.
As Privacy News Online has reported in the past, the authorities can demand your bitcoin transaction data from crypto exchanges. If the authorities did investigate, they might then discover that I made a transaction with a public address linked to a drugs market.
This is an extreme example, but it should serve as a reminder that bitcoin transactions are not fully anonymous.
Your bitcoin transactions are only private until someone pierces your pseudonym.
What Should I do Instead?
The simple advice here is to use a different public address every time you make a transaction. That means using a different bitcoin wallet for each bitcoin interaction.
Alternatively, you can use a cryptocurrency with superior privacy features, like Monero or Zcash.
In the coming weeks, I’ll dive deeper into this topic. We’ll cover privacy coins in more detail and look at some best practices to stay safe and private.
Crypto curious?: Get started with Block Explorer’s beginner’s guide to bitcoin.