Bitcoin is Not Anonymous: How to Protect Your Identity with a VPN

A common misconception about Bitcoin (and most other cryptocurrencies) is that they are anonymous. However, this is not the case.

In fact, even Bitcoin.org themselves have clearly stated on their site that:

“Bitcoin is not anonymous. Some effort is required to protect your privacy with Bitcoin. All Bitcoin transactions are stored publicly and permanently on the network, which means anyone can see the balance and transactions of any Bitcoin address. However, the identity of the user behind an address remains unknown until information is revealed during a purchase or in other circumstances. This is one reason why Bitcoin addresses should only be used once. Always remember that it is your responsibility to adopt good practices in order to protect your privacy.”

It is easy to see why Bitcoins are often mistaken to be anonymous as it is often advertised as an “anonymous digital currency” by the media and it has been made infamous as a criminal’s currency of choice on Silk Road, the world’s largest online illegal marketplace.

To learn why cryptocurrencies like Bitcoin are not fully anonymous, we must first learn the basics of how these transactions work. When using Bitcoins, you need a Bitcoin address, a single-use token containing a string of random numbers and letters. You would send Bitcoins to another person’s Bitcoin address the same way you would send an email to someone’s email address.

Bitcoin is decentralized and people exchange value without intermediaries, every transaction is always recorded on a public record for all to see. This online public ledger is known as the blockchain.

FACT: EVERYTHING DIGITAL LEAVES A TRAIL

Bitcoins are pseudonymous, not anonymous. Much like book authors writing under pseudonyms, pseudonym addresses used when transferring cryptocurrencies are the same. If the real identity of the author was connected to their pseudonym, all their works which were written under the pseudonym has now been associated with their true identity.

Similarly, all transactions with Bitcoin using your pseudonymous address is stored forever in the blockchain. If this address is ever linked directly to you, the whole world will know every transaction you have ever made. Once your identity is connected to your Bitcoin address, your anonymity is gone forever.

FACT: STORES CAN LINK YOUR IDENTITY

There are various techniques you can adopt to increase your anonymity when dealing with cryptocurrencies. These may include performing multi-input transactions, maintaining multiple wallets, utilizing mixing services to trade out Bitcoins or using web-hosted ‘eWallets’ to mask the original owners.

However, these efforts do not matter if the stores and retailers that you are using are linking your identity to your Bitcoin address. What’s more, this not only applies to online stores but the payment processors which the retailers are using who can link your identity.

For instance, if you are paying Bitcoins to your online retailer which may be taking your customer identity information, you are already allowing them to link that identity to your blockchain pseudonym. Again — once your identity is connected to your Bitcoin address, your anonymity is gone forever.

FACT: CRYPTOCURRENCIES DO NOT ENCRYPT TRAFFIC

Under the Bitcoin protocol, when you send coins, the transaction is posted to Bitcoin’s nodes unencrypted and in plain sight. Similarly, communication between nodes is also unencrypted. Anyone monitoring the network such as ISPs or the government can obtain information on where transactions and blocks originate and can link Bitcoin addresses to IP addresses, which can be used to de-anonymize users.

YOU MUST PROTECT YOUR PRIVACY WHEN USING BITCOIN

A VPN (virtual private network) can protect your privacy when using cryptocurrencies by:

• Encrypting all outgoing traffic from your computer while you are doing your financial transactions.
• Prevent ISPs, governments or the NSA from looking into your wallet/node traffic and determining your transactions or even wallet balances.
• Allow you to purchase products anonymously (including VPNs) using cryptocurrencies while not revealing your true IP address.
• Bitcoin + VPNs should always come hand-in-hand.

Check out which VPN is right for you.