Bitcoin is not as Anonymous as you Might Think

The common saying is that Bitcoin is an anonymous cryptocurrency. Some may think that it is even as anonymous as real cash. There are many articles and even self-appointed experts saying that Bitcoin is “anonymous”. I think that most people come to this conclusion because Bitcoin is indeed used in black markets. Bitcoin is used to sell and buy drugs, weapons, and even contract killings in the darknet. Yes, this is definitely not the brightest side of Bitcoin. Unfortunately, complete anonymity is with the current use case of Bitcoin not possible.

Humans are the Problem

When you want to transfer money to me by using PayPal, the only thing you need is my Email address. This payment passes several intermediaries until it finally arrives at my bank account. Every intermediary has an interest in knowing exactly who the payee and payer is. Every intermediary knows exactly who you are, this has law compliance and risk assessment reasons. I would say the current electronic finance system is the opposite of anonymous.

Now let’s assume you want to send me money by using Bitcoin. To send me money you will need my bitcoin address (public key), this is our hint number one. Secondly, as soon as you send me bitcoins the payment will settle within no more than ten minutes. This means that our transaction is publicly recorded in the blockchain. You can imagine this blockchain like a global, to everyone visible, Excel spreadsheet where every single payment is recorded and no erasing is ever possible. A bitcoin address looks somehow like this: “3J98t1WpEZ73CNmQviecrnyiWrnqRhWNLy”. In theory, under perfect circumstances, it should not be possible to detect the identity of this bitcoin address. But the reality looks different.

Traceability of Bitcoins

If we are exchanging bitcoins we are indeed not disclosing our real identities but instead bitcoin addresses. The actual problem occurs when both parties know each other or when the bitcoin address is encountering the real financial system. Let me explain this in more detail for you at the example of two cases.

(1) Your party knows you

If you are sending or receiving bitcoins to a party who knows who you are, it is very obvious that he now has a real life connection between your Bitcoin address and your real identity. Example: You know my Bitcoin address and my personal name. Now you can make your findings public or you can crawl through the whole blockchain to track other transactions I have made.

(2) Your Bitcoin Exchange Platform has to store your identity

If you have ever bought bitcoins by using a commercial exchange platform it might be possible that they have stored your personal information (e.g. name, IP address, credit card details, etc.) due to legal requirements. Authorities could know in theory crawl through the blockchain to see which transactions you have been part of.

As soon as a hacker, a government or any other organization is able to track and connect a majority of bitcoin addresses with real world identities they will be able to calculate a completely transparent transaction history with real world identities. Researchers conducted several experiments about this reasoning and they came to the conclusion that up to 40$ of Bitcoin users could be personally identified by using behavior-based clustering methods (Androulaki et al. 2012). By analyzing these statistical findings researchers (can we call them hackers?) were even able to reveal the identity of Bitcoin users (Reid and Harrigan, 2013). Even by using multiple wallets and multiple Bitcoin addresses you will not be able to hide your identity. Observers are able to track your behavior and link all your different Bitcoin addresses together (Ober et al., 2013).

Can I still use Bitcoin anonymously?

Yes, in theory, and with a little effort also in reality. You need to make sure to never reveal your real identity when handing out your public Bitcoin key. This includes Bitcoin exchange platforms, as well as transfers to real persons who know you personally.

The best way to use Bitcoin anonymously is to mine new Bitcoins and further on never send or accept money from people you know (and don’t trust).

References

Androulaki, E., et al., 2012. Evaluating user privacy in bitcoin. IACR Cryptology ePrint Archive 596. Retrieved from http://fc13.ifca.ai/proc/1-3.pdf.

Ober, M., Katzenbeisser, S., Hamacher, K., 2013. Structure and anonymity of the bitcoin transaction graph. Fut. Int. 5 (2), 237–250. Retrieved from http://www.mdpi.com/1999-5903/5/2/237.

Reid, F., Harrigan, M., 2013. An analysis of anonymity in the bitcoin system. In: Altshuler, Y. et al., (Eds.), Security and Privacy in Social Networks. Springer, New York. Retrieved from http://arxiv.org/pdf/1107.4524v2.pdf.

Did you know that Bitcoins are not completely anonymous? Did this article change your mind about Bitcoin? Let me know what you think by leaving a comment. I’ll join the discussion!