One of the biggest misconceptions surrounding cryptocurrencies has to do with privacy and anonymity. You will often hear people talking about how bitcoin and other cryptocurrencies would enable terrorism and other criminal activities because of their anonymous nature.
Bitcoin and other cryptocurrencies are digital currencies, which means that they only exist in the digital world and only when people use them. At the same time, bitcoin and other cryptocurrencies have logs that track their origins and destinations, which is why even though bitcoin is more anonymous than using a debit card or a credit card, using the cryptocurrencies is not an entirely anonymous activity. There is a level of anonymity to it, but the degree of this level is subjective and is a matter of an opinion.
When you receive payments in bitcoins and pay with bitcoins for products and services, you can hide your identity behind the number of your bitcoin wallet. The address of a bitcoin wallet is a long and complex string of numbers and letters, including lowercase and uppercase. The numbers of the wallets are not connected to individuals or geographical locations and give no hints or insights into who you are or where you are. In this regard, cryptocurrencies do offer a certain level of anonymity compared to regular currencies. With Bitcoin and other cryptocurrencies, all you need to receive and send payments is the number of your wallet. You do not need to provide the other party with your full name, address, bank name and address, and account and routing numbers in the way you do in traditional banking.
However, at the same time, all bitcoin wallet addresses are a part of a ledger that is open for viewing by anyone at any time. The technology behind Bitcoin, called blockchain, tracks all the incoming and outcoming bitcoin payments in real time for all the wallets. For example, if a friend of yours were to send you 0.001 bitcoin, anyone would be able to see the transfer from one wallet to another in real time. No one would know the parties behind the transaction, but the transaction will be visible to everyone.
After someone learns the address of your bitcoin wallet, they can track all your transactions at www.blockchain.info. When they do visit the website, not only will they be able to see your current transactions, but they will also be able to see a full history of your previous transactions associated with the valet. This means that once someone knows your wallet number and knows that you are the owner of the wallet, all the anonymity is gone. For this reason, statements that the governments will not be able to track the financial activity of criminals are simply not true. Once the government knows the wallet number, it can get the entire transaction history for the number. In this regard, it is possible to get even more information about someone using bitcoin that it is to find multiple bank accounts in regular banks and track their activity and transactions.
The matter changes a bit when someone uses a bitcoin exchange. While anyone would be able to see that you used the exchange and there was a transaction between your wallet and the exchange, tracking bitcoins gets complicated. In this sense, there is a certain degree of anonymity.
There are certain ways to stay anonymous when using bitcoin and other cryptocurrencies, but these ways are not very user-friendly at the time.
One of the biggest issues with trying to increase the degree of anonymity when using bitcoin is that to do so you need to rely on a third party. Bitcoin was created with the philosophy of full transparency and decentralization in mind. This philosophy essentially eliminates the middle man and puts bitcoin users in control of their funds at all times. When you use a third party, you essentially go against the values and principles of bitcoin, which is why the process may get complicated. In addition to this, using a third party will raise suspicions of illegal activities on your part because when you use your bitcoin wallet number, you are semi-anonymous already.
The story is similar when it comes to protecting your privacy. While you can create a new address for every individual payment and you can avoid posting your public bitcoin wallet address in a public forum, the ways to do so require some effort and planning.
When receiving a bitcoin payment, you can give a brand-new unused wallet address to the sender. This address will not have a direct link to any of your existing addresses and is known as a throwaway address.
In addition to a throwaway address, you may also be able to generate a change address. For example, if you decide to use Bitcoin Core software, you will be able to create a new change address every time you decide to send a payment to somebody. A change address happens when the amount that you are sending is less than the total amount of bitcoins in your wallet. For example, if you are sending 1 BTC and have 3 BTC, you will have an option of sending the change of 2 BTC that belongs to you to a newly created address. When you do create such an address, there is no direct link between the old address and the new one even though these addresses do become a part of transaction history.
To protect your privacy, you want to avoid posting your public bitcoin wallet address on forums, websites and other public places on the Internet. Once someone realizes that your wallet belongs to you, there is no way to restore your privacy other than by using the methods described previously in this article.