Bitcoin Privacy Issues
It has been established that Bitcoin offers better security compared to fiat currencies. However, this type of security is only due to the fact that Bitcoin is more difficult to steal or duplicate. But this does not mean that the use of Bitcoin is completely private or anonymous.
The Bitcoin network uses the blockchain technology, which requires every transaction to be recorded in blocks on a public ledger. This record is permanent and everyone has access to it. But it is also thanks to the nature of blockchain that Bitcoin is more secure. Here are two main measures:
- A part of the mining process requires verifying transactions. So for a group of miners, they need more than half of the total computing power to allow a false transaction through.
- Every block of transactions is hashed, and the hash for each part is embedded in the next block. Basically, this means that every block is connected to the last, making it almost impossible to alter previous transactions.
There is no question that Bitcoin is secure. But in terms of privacy and anonymity, there is much to work on. As mentioned earlier, every transaction involving Bitcoin is recorded on a public ledger. This ledger does not store actual names, but it does record the digital wallet address of both the sender and receiver, as well as the transaction amount, date, and time of the transaction. Digital addresses are generated by wallets and any user can see the balance and past transactions of each digital address.
Unfortunately, tracing a wallet address to the real user via the IP address is easy. The IP address is not considered a piece of personally identifiable information because it identifies a device instead of a person. However, it does not take too much of an effort to link the IP address to an actual user. What this means is that even if you utilize a different digital wallet address for every transaction, it will be very easy for others to find out information, such as:
- The amount of bitcoin you have
- The items you bought or services you subscribe to
- The people you are sending funds to
Aside from being traceable, coins can also be easily tainted because every coin has a certain history. Coins can be tainted if they have been used in illegal activities like gambling.
Why Transact With Bitcoin Anonymously
As mentioned earlier, privacy, or the lack thereof, in Bitcoin transactions entails a lot of problems. This means that anyone who wants to find out details about your transaction history can easily dig out the information that they need. In the worst-case scenario, you might become a prime target for a physical attack if cybercriminals know that you have a large amount of Bitcoin.
This situation is not new. A lot of people have been targeted by cyberattacks around the world just because some nasty criminals found out how much Bitcoin they have on their wallets. And these attacks do not stop with stealing their Bitcoin only. It could also lead to compromised data, identity theft, and other types of cybercrime. These are considered extreme cases, but there are lots of other reasons you might need more anonymity, including:
- Paying for a sensitive or private medical procedure
- Making an anonymous donation
- Preventing advertisers from monitoring your purchases
- Preventing hackers from accessing your personal details
- Maintaining general online privacy in terms of what you spend and where
- Ensure your clients’ privacy
- Keeping trade secrets
Fortunately, there are ways on how to pay using Bitcoin safely. Whether you want to pay bills with Bitcoin, transfer funds to another account, use Amazon Pay with Bitcoin, or shop online using this cryptocurrency, ensuring your online privacy is a must.
How to Pay With Bitcoin Securely
No transaction is completely anonymous since there will definitely be other ways to trace physical movements, but following certain methods can help users buy and pay with Bitcoin more securely and anonymously.
If you want to ensure the privacy of your Bitcoin transactions, using a VPN is a must. Not only does it mask your real IP address so that it won’t be traced back to your digital wallet, a VPN will also encrypt your traffic to prevent your activities from being monitored by third-parties. Once you have configured your VPN, you can proceed with the following steps to secure your Bitcoin transactions:
Step #1: Configure Your Bitcoin Wallet.
Before you can start to buy or use any Bitcoin, you first need to have somewhere to store and send it to. Your digital bitcoin wallet serves as a secure place for keeping your private keys.
There are several types of Bitcoin wallets and each of them has different features and levels of security. There are paper wallets, physical bitcoin, mobile wallets, e-wallets, desktop wallets, and even hardware wallets. You need to find out the differences between these wallets to find which one fits your needs.
Most of these wallets are easy to set up and configure. You just need to download the wallet from the developer’s website, the App Store, Google Play Store, or other app repositories, then install it on your device. E-wallets and other web-based wallets don’t need to be installed and you can directly set up your account using your browser. Then, you need to simply follow the instructions to complete the setup and get your wallet ready for use.
Step #2: Buy Bitcoin
The next step is to get some Bitcoin to fill your wallet with. In terms of buying Bitcoin, you have several options and each of them varies when it comes to privacy, cost, as well as risk. Here are some of the ways to get your hands on some Bitcoin:
Via Coin Exchange
This is actually the simplest method, but it is not entirely safe and anonymous because this requires handing over your payment details to a third-party. But if you choose to go down this route, mixing coins, which will be discussed in the next step, should help you gain some anonymity after doing the coin exchange.
Coin exchanges allow you to buy Bitcoin using fiat currencies, and some of the popular ones include Kraken, Coinbase, and Bittrex. After purchasing Bitcoin using your bank account or credit card, you can then send it to your digital wallet address.
From a Direct Seller
A more anonymous option of buying Bitcoin is by purchasing it directly from a private seller. There are specific websites, such as LocalBitcoins and Bisq, that allow you to connect with users selling Bitcoin and negotiate a purchase. Aside from the extra privacy, buying from these sellers often involves better rates compared to those bought via exchanges. Unfortunately, this method is less convenient than coin exchanges and can be more dangerous if you don’t know who you are buying from.
From a Bitcoin ATM
The third option is actually the most anonymous method of buying Bitcoin: through a Bitcoin ATM. If there is one near your location, this option is more secure because no ID or verification is required. You just need to insert the money, provide your wallet address, and the Bitcoin will be reflected on your account. Bitcoin ATMs are really convenient, but this convenience comes at a price in the form of high transaction fees. Plus, the locations of these Bitcoin ATM machines will likely have some camera monitoring the area, which will definitely ruin your anonymity efforts.
Step #3: Mixing Coins
The key process in making your Bitcoin transaction more anonymous is by mixing your coins. This is also called coin tumbling or laundering. This process involves mixing coins from multiple parties, thus breaking the connection between the sender and the receiver of the coins. This makes your transactions practically impossible to trace.
Bitcoin mixing is a complicated process, but we’ve outlined the simplified version below. You have the option to mix bitcoins using clear web services, but this is not entirely private so it is not widely recommended. If you want thorough anonymity, you need to do the entire mixing through the Tor browser.
Here are the steps you should follow when mixing your coins:
1. Once you’ve launched Tor, go to a reliable mixing service site. Bitcoin Blender is a good option because it has its own .onion site. If you don’t want to use the Tor browser, you can use a good VPN instead when using the mixing service website.
2. The next step is to create an anonymous wallet and connect it to a burner email address. You can try Mailinator or other burner email service providers. This temporary email will serve as your intermediary wallet, so you do not have to send Bitcoin directly from your wallet to a mixing service. Your digital wallet should always be accessed securely using Tor or a VPN service.
3. Send funds to your intermediary wallet by transferring Bitcoin from your market wallet, which you have funded earlier.
4. Next, you need to create a third wallet using the Tor browser using another burner email and a new password. This third wallet is going to be the final destination of your Bitcoin. You can create multiple addresses so that you can split your Bitcoin randomly between them. This will make blockchain analysis more challenging and your transactions more anonymous. You can even set up multiple digital wallets to make things more complicated.
5. Once you’ve created your wallets and funded them, go to a mixing site like BitBlender or CoinMixer via their respective .onion URL.
6. If you’re using BitBlender, you can either sign up for an account (for multiple mixing sessions) or simply choose Quick Mix for faster processing.
7. You will then be given an address to which you can send the pre-mixed coins, and you’ll need to enter this address at the end of the mix.
8. Transfer the coins from your intermediary (second) wallet using the address given by BitBlender, then wait for them to be mixed and sent to your destination wallet(s).
Coin mixing is a time-consuming process, but this is a necessary step if you want to ensure the anonymity of your Bitcoin transactions.
Step #4: Pay Using Bitcoin
After you have mixed your coins, you now have your clean Bitcoin, which should not be wasted in traceable transactions. In order to shop or pay bills with Bitcoin anonymously, you’ll have to use either the Tor browser or a VPN to maintain your privacy. You should also make sure that the merchants you work with accept Bitcoin and that do not require any potentially identifiable information.
Here are some of the things you need to remember when using Bitcoin:
For Physical Goods
When you shop online or order items from online shops, you need a physical address to receive those physical items. Because of this requirement, buying physical goods anonymously is a lot more challenging. You can try to use a PO Box, an office address, or other physical address that you do not own so that your purchases won’t be traced directly back to you. However, it is still possible to link these activities to you in some way.
But there are certain purchases, such as those via classified websites or direct P2P sales, wherein the merchant does not keep a record of your address. So if you can pay using bitcoin and you can request the merchant not to save any of your information, your purchase can remain anonymous.
For Digital Items
The good thing about digital products, including movies, music, software, apps, and games, is that you don’t need to give out your physical address to receive them. Some merchants can send your items via email (use a dummy email as much as possible) or you can download them directly after payment. So, if the merchant transacts with Bitcoin and uses a .onion website, then making an anonymous purchase is possible.
Just like digital goods, digital services usually don’t require identifiable information. For instance, if you want to subscribe to Netflix, you just need an email address, for which you can use a burner, and pay using Bitcoin.
Using Bitcoin has a lot of advantages, including relatively lower transaction fees, more secure payments, and faster transactions. However, when it comes to online privacy, it is extremely lacking because of the way the blockchain technology works. All transactions are recorded in a public ledger which can easily be traced back to the user’s digital wallet and the user’s IP address. So if you’re wondering how to pay with Bitcoin without compromising your identity, simply follow the steps above and you won’t go wrong. It also helps if you use the Tor browser or a reliable VPN service for that extra layer of privacy.