The way that Bitcoin works is very interesting. It provides anonymity as well as transparency. Transactions conducted on the blockchain are transparent, in that everyone can see the record of past transactions, how many Bitcoins were moved from one address to another.
At the same time, there’s some anonymity involved too. Just because you know a few Bitcoin wallet addresses doesn’t mean that you can find out who their owners are. This is one of the reasons why many government bodies take issue with cryptocurrency users.
But, anonymity only goes so far. Not all Bitcoin wallets are as private as you may think. In some cases, it doesn’t take long to trace Bitcoin transactions to the user’s doorstep. For complete anonymity, certain features need to come together.
What Is an Anonymous Bitcoin Wallet?
An anonymous wallet is more than a private wallet. It’s a wallet that goes a step further in protecting its owner’s identity. It’s not complicated as it doesn’t provide additional security or authenticating factors.
It’s simply a wallet that generates an address that isn’t tied to your real identity. One that doesn’t require you to provide confidential information to start moving cryptocurrencies.
Why Is Anonymity Becoming Increasingly Difficult to Protect?
It’s all for regulations. The traditional financial system doesn’t like the idea of a decentralized virtual financial system. There’s also an argument about the use of Bitcoin and other cryptocurrencies in the transactions of illegal goods and services.
You’ve probably heard of the Silk Road website and all the activities that went down on the illegal marketplace.
So why is it increasingly harder to procure Bitcoins while keeping your identity secret? It’s because crypto exchanges now have to adhere to stricter regulations, as imposed by governments around the world.
Here Is How Your Identity Gets Revealed
When you buy Bitcoins, you register first on an exchange market that deals in crypto. You then have to supply your account with fiat currency for purchasing crypto coins. This usually means funding your wallet with your credit card or directly from a bank account.
Therefore, the exchange has financial transaction records for your account. Records that clearly indicate who supplied money to that account. When you convert your fiat currency into Bitcoin, a record of the purchase appears on the blockchain.
Every transaction you make from that point on will remain on the public ledger. It’s then possible for third parties and government agencies to trace the Bitcoins back to you.
Whenever you sell or simply transfer Bitcoins from your exchange wallet, the ledger makes note of those transactions. The trail of the Bitcoins is easily traced by anyone. Interestingly enough, going through your transaction will also bring up past transactions involving those Bitcoins before you purchased them.
The issue is that Coinbase and other similar exchanges now hold identifying information on its users. Therefore, when someone flags and tracks certain transactions they can track them back to the originator. In this case, you.
Because you’ve made that transaction through Coinbase, authorities can request the information of the account holder. Using the payment information stored on their servers, exchanges can reveal your real identity.
In essence, Bitcoin users only really remain anonymous among themselves. Buyers and sellers may not be able to find out who they are. But other interested parties can.
Like It or Not, It Has Its Uses
The lack of anonymity is not necessarily bad. Once it became possible to track Bitcoin users to their real-world identities, government bodies became more accepting of the cryptocurrency.
It makes sense since it’s much harder to use crypto for money laundering, trading in illegal services, and so on.
What’s There to Do If Most Exchanges Are Centralised Markets?
Here are a few ways in which you can buy Bitcoins anonymously. First of all, you can use a Bitcoin ATM to withdraw Bitcoins.
These don’t require documents, only an address. You can put cash in the machine and receive that amount in Bitcoin to the address of your choice. Furthermore, Bitcoin ATMs also have the feature of generating a unique address for you.
So, any hardware wallet or paper wallet that you have can essentially become an anonymous Bitcoin wallet. Hardware wallets don’t require identifying information for you to use them. Therefore, you can simply buy Bitcoins with cash on an ATM and send them to your valid address.
From that point on, any transfers you make within the blockchain won’t carry any identifying information, other than your Bitcoin address.
Peer-to-Peer Decentralised Platforms
There’s another alternative to exchanges. It’s called a peer-to-peer platform. It’s a decentralised platform that doesn’t ask any identifying documents from its users.
However, such platforms may prove unfavourable for investors or regular crypto users. The reason? Every user on the platform can set his own selling and buying prices. This means that it can get more expensive than using an exchange.
That said, a p2p platform such as LocalBitcoins does accept a variety of payment methods. Some are anonymous compared to direct bank transfers.
When using such a platform, it’s also a good idea to use a VPN service. That way you’re also hiding your IP address and your location while conducting business on the platform.
Are Anonymous Wallets Truly Anonymous?
Not entirely. The concept of a Bitcoin anonymous wallet implies that the wallet uses advanced encryption methods to secure your identity, files, and so forth.
But encryptions can be broken. Another way that some wallets approach anonymity is by using new addresses for every transaction. With all funds being accessible from the same wallet.
In a sense, this could work. However, in reality it may only slow down third parties from figuring out your identity.
The only way to ensure anonymity is by limiting your exposure on the network. So, for this to work you have to change the way you conduct Bitcoin transactions.
Wallets won’t offer complete anonymity. Not as long as you’re buying your Bitcoins from places that require you to verify your identity.
Creating an Anonymous Wallet
Paper wallets are unhackable. They also have the added benefit that no one can trace the address’ creation back to you. As long as you follow these simple steps:
- Download a bitcoin address generator
- Disable your internet connection
- Open the address generator and run it
- Create an address and private keys
- Write down the address and keys on one or more pieces of paper
- Close the generator
- Delete all files associated with the generator before re-establishing your internet connection
Now you have a valid address that will be recognized on the blockchain. You can buy Bitcoins with cash at ATMs and send it to your address. You can then use the keys and address to transfer Bitcoins to another user.
Remaining Anonymous When Converting Bitcoin Back Into Fiat Money
There are two ways to ensure anonymity when converting your Bitcoin into fiat currency for profit. The first is finding a trustworthy person and conducting face-to-face exchange.
You send Bitcoin to that person’s address and receive money in hand at the exchange. It’s a little tricky and perhaps not advisable unless dealing with people you know, or if you can convince them to pay you first. Still, this is something that keeps you anonymous in the eyes of interested government bodies.
Another and better method is once again the trusty Bitcoin ATM. You can feed the machine cash and sent the equivalent amount in Bitcoin to your address. You can also do the exact opposite.
You can put in your address and withdraw cash from the ATM. Various ATMs will have their own limits. Of course, the ATM will also likely only dispense the local fiat currency.
A Few Words of Caution on ATMs
Not all Bitcoin ATMs worldwide allow users to buy Bitcoin without identifying themselves. Some still do, but not all of them.
Also, there will be limits on the amount of money transacted. This is especially true if you’re not supplying a verifiable ID. This is so that the ATMs can adhere to anti-money laundering regulations.
However, it doesn’t mean that you can’t make a bunch of small withdrawals.
Last but not least, anonymity comes at a price. When you buy Bitcoin from an ATM, it’s usually priced higher than the market price. Sometimes it can be even 20% more expensive. That’s something to keep in mind if you decide to keep your crypto transactions secret.
How Anonymous Can Software Wallets Be?
If you’re buying Bitcoin in either of the two methods previously listed, then it can be quite private. However, whenever you use a Bitcoin wallet app, companies that provide them may also ask for identifying documentation.
Of course, the company shouldn’t have access to your address too. Addresses and keys are provided once you log into the app and generate them. But there may still be a record of your purchasing that app or downloading it.
One could tie you to certain transactions by checking the blockchain transactions and comparing prices to your fiat currency dealings. It’s hard but not impossible.
Furthermore, software tools can be hacked. Once you’re online and using your wallet you’re subject to attacks. Or malware infections. Not as much though as large crypto exchanges, which for the most part are still more likely targets than individual users.
How Anonymous Can Hardware Wallets Be?
It’s the same thing as with software wallets. A hardware Bitcoin wallet won’t be sold to you with an already known address. That address is something that you generate with the help of the gadget once it’s in your possession.
So, no one should be able to tie that gadget to a specific address unless you get sloppy yourself. But, one can still track the ownership of the wallet back to you. Of course, that’s not enough to also reveal your address and gain access to your past transactions. But it can shine a light on the fact that you’re a Bitcoin user.
Ledger Wallets
Ledger wallets are hardware Bitcoin wallets. They’re known as light devices that don’t cost a fortune and that provide offline storage for your crypto assets.
They feature 12-phrase passwords for recovery purposes, PINs, and support for a variety of crypto coins aside from Bitcoin.
It’s a device that’s unlikely to be hacked even when plugged into a computer with an active internet connection. However, it makes moving funds a bit trickier since you’ll always have to plug it in and generate your keys to authenticate transfers.
Paper Wallets – Anonymous but Dangerous to Use
If there’s one thing that no one likes about the Bitcoin paper wallet is that it doesn’t have a failsafe. If you lose your paper and don’t have the information memorized, then your Bitcoins are lost forever.
There’s no such thing as creating a backup except for making multiple copies of your paper wallet. There’s no cloud backup, hardware backup, or passphrase you can use to restore that information.
So, while it does help to keep your keys and address away from prying eyes, it’s also a risky wallet to use.
Some users recommend using multiple paper wallets for various transactions, depending on their size. It’s advised to avoid making large purchases and dumping large amounts of crypto into a single paper wallet. It’s not the most durable material and can be easily lost.
Anonymity – Is It a Necessary Evil?
Clearly governments aren’t thrilled about a decentralised financial system that could also keep all its users operating anonymously. However, is anonymity that bad?
While cryptocurrencies have been used for illegal activities, it may also be easier for government bodies to go after the illegal marketplaces themselves, as opposed to invading the privacy of all cryptocurrency users.
It’s the same reason why the idea of Big Brother is frowned upon. The liberties of many are infringed upon because of the actions of a few. Luckily, there are still ways that you can maintain your anonymity as a crypto user. It just takes the fun and convenience out of trading crypto since it’s not a seamless process like logging into an exchange wallet, entering your credit card information, and buying as much crypto as you want.