Is Bitcoin Anonymous or Not?
One of the main problems with fiat currency, which Bitcoin was created to solve, is the lack of confidentiality of user information. The unknown developer of this cryptocurrency payment system sought to make Bitcoin anonymous. To do this, the creator (or creators) used the technology of decentralized information storage and other methods to increase privacy.
However, the absolute anonymity of Bitcoin could not be achieved. In this regard, it is useful for cryptocurrency users to know how best to maintain the confidentiality of their personal information. So, is bitcoin anonymous or not?
How to buy bitcoin anonymously. Read more here.
How do Bitcoin transactions work?
To achieve consensus (a single point of view on the cryptocurrency chain) in the Bitcoin blockchain, miners use the Proof-of-Work (PoW) algorithm. The mechanism is based on the use of computing power. It performs two tasks:
- Finding the hash (abbreviated identifier of an array of encrypted information) of transactions and network blocks.
- Verification of the validity of the updated version of the system and synchronization of copies of the chain by miners, if the values obtained are correct.
Bitcoin transactions are sequentially included in blocks. Hierarchy is needed to build the correct structure of the cryptocurrency chain. For the same reason, Bitcoin transactions link to each other.
For example, let’s say a random user sends 10 BTC to his friend. First, miners must check where these funds came from in the wallet of the initiator of the transaction, and then where they need to be transferred.
The Bitcoin network participants use a digital signature to confirm transactions. It is generated based on the private key assigned to the wallet of the initiator of the transfer.
In each new block, the beginning of the list of bitcoin transactions is the miner’s reward for creating a link in the digital chain. Such operations are assigned a software property of Coinbase, which can have any content.
Is Coinbase safe to use? Read more here.
However, in the subsequent bitcoin transactions, it is replaced by the scriptSig parameter, which includes the public cryptocurrency key of the recipient of the previous transaction.
What makes bitcoin anonymous?
The blockchain preserves the confidentiality of user data. The anonymity of Bitcoin is created by features of the network such as these:
- Lack of binding of cryptocurrency addresses (numbers) to users. To generate a new repository, Bitcoin system participants do not need to provide personal information. They can also create wallets in any quantity when required.
- Lack of binding of bitcoin transactions to their initiators. To make a cryptocurrency transfer, BTC holders also do not need to provide personal information.
- A random sampling of nodes for processing operations. Data on bitcoin transactions are relayed by miners within the network. Although mining nodes communicate with each other via IP addresses, they cannot be sure that they receive transfers from their initiators for processing.
Is bitcoin anonymous?
The privacy of Bitcoin network users may be violated. Because of this, the cryptocurrency community considers the Bitcoin system a pseudo-anonymous coin. There are 5 ways to identify the identity of the sender or recipient of BTC:
- Source of funds
- Transaction graph
Bitcoin is a transparent digital chain. Users are free to take public information from the blockchain, if necessary. It is easier to do this through crypto network monitoring services.
Using public information, the analysis method can determine the territory where the owner of the selected wallet lives. To do this, you need to do the following:
- 1. Choose a bitcoin transaction.
- 2. Copy the translation hash.
- 3. Find the wallet of the sender or recipient (depending on the purpose) by the identifier of the bitcoin transaction being conducted through the monitoring service of the cryptocurrency network.
- 4. Use the received wallet address in an advanced blockchain browser like oxt.me.
- 5. Determine the period of the least wallet activity (indicated in UTC in the monitoring service).
After the fifth step, you will need to add a certain amount of time to the found interval.
Source of funds
There is a concept of “transaction inputs” in digital networks. They are a kind of history from where the cryptocurrency comes to a new address — UTXO (source of funds). Transaction inputs allow you to bypass the anonymity of BTC.
Since bitcoin transfers form a sequential chain, UTXO is not the sender’s wallet address or the hash of the transaction itself. Technically, the source of funds is the unspent output (recipient) of the previous transfer.
You can determine UTXO by using advanced monitoring services of crypto networks. They show the entire list of inputs and outputs of Bitcoin transactions and how transfers are actually made. With this information, it is easy to find out the number of bitcoins in the wallet of the tracked user.
Thanks to UTXO, bitcoin transfers are collected in a chain. In the community of users of digital assets, it is called the BTC transaction graph. Through it, you can track the transfer of cryptocurrency from bitcoin wallet A to vault B. At the same time, the depth of use of the graph is not limited. Bitcoin blockchain participants can track the full history of the cryptocurrency transfer before and after a specific transaction.
The owners of some addresses are known to the public. Basically, these are the numbers of the repositories of popular personalities or large companies. When bitcoins arrive at a known address, it will be possible to say exactly who owns the cryptocurrency.
Bitcoin transfers can have multiple sources. These often include delivery addresses. Such numbers are automatically generated by the service where the user created a bitcoin wallet. They are needed to transfer the change back to the account of the initiator of the BTC operation.
From a technical point of view, the total number of coins in the vault is one “bill.” You can’t send only part of it. To conduct a bitcoin transaction, you need to send a whole “bill.” The remaining amount is returned as change. This principle is similar to paying for goods in a store.
Bitcoin delivery addresses and other UTXOs can be collected in groups. This process is called clustering. The analyst collects information about different sources of funds to determine their involvement in the financing of a particular wallet. Having collected such a cluster, we can assume that they belong to a common owner. At the same time, disclosure of the owner of one address will lead to the deanonymization of the entire group.
Time, UTXO, the bitcoin transaction graph, and clusters together allow you to associate one owner with a group of addresses. All this information is called “heuristic data.” They can reduce the anonymity of Bitcoin. However, confidential information can be protected.
What can you do to remain anonymous?
Anonymity in the Bitcoin world is still the object of an “arms race.” While a lot of efforts are being made to improve the anonymity of Bitcoin, at the same time, new ways are emerging to reveal the identity of cryptocurrency users.
Therefore, the best thing you can do to remain anonymous is to use Crypton (CRP), which doesn’t disclose users’ personal data or transaction details.
Are you interested in secure payments and money storage? Then choose CRP. Read more here.
But in the end, the security of Bitcoin depends on the specific users and their requirements – this is not a code problem. Bitcoin owners can enjoy a certain level of anonymity depending on how much personal data they disclose, what security methods they use, and how often they do it.
How to buy bitcoin in the UK. Learn more here.