It is widely believed that Bitcoin offers full anonymity, but this is not the case. While transactions using Biti Codes do not involve passing personal information, it is still possible to trace a user’s activity back to their wallet address.
If any of those addresses are linked to someone’s details, all the transactions done with them will be publicly associated with that individual due to Blockchain keeping a permanent record of each transaction.
Learning how and when anonymity may be compromised can help users take additional steps in protecting their identities. Making use of a new address for each Bitcoin transaction is highly recommended, and while this method does offer some anonymity benefits, it has its flaws.
What is Bitcoin?
Each Bitcoin transaction involves inputs and outputs, where the inputs are addresses that send out Bitcoin with a unique private key that must be used to transfer it. The output refers to one or more recipients who receive transferred Bitcoin. Whenever you make a transaction, your inputs will be moved from one address to multiple outputs – making sure that all of the correct information is given and received correctly.
During Bitcoin transactions, multiple inputs and outputs are often merged. For example, if a person wants to buy an item for 1.5 Bitcoin but only has two 0.5 inputs in their wallet, they can merge those two inputs into one transaction and send the extra 0.5 Bitcoin of change to a different address within their wallet. This process allows individuals to make efficient use of minor amounts stored in various addresses with minimal fees paid on each transfer.
How can the anonymity of bitcoin be compromised?
The Transaction Ledger
All Bitcoin transactions are traceable and open to everyone, which means that one user can be linked to multiple addresses. If an individual’s identity is associated with any address, then the remaining related ones in the group will also be attributed to them.
Using a Personal Identity
If a Bitcoin owner makes use of their identity in any way while conducting Bitcoin transactions, such as on an exchange, they may jeopardize the level of anonymity that digital currency provides. For instance, if someone orders something online and enters their address for delivery purposes, this could easily connect the person’s name to their specific Bitcoin wallet. Any input addresses used in the said transaction will become traceable back to the buyer’s details unless extra measures are taken beforehand to ensure further anonymity.
The Bitcoin network may not be 100% secure, as attackers can use multiple nodes to track the origin of transactions. This could potentially compromise user privacy concerning cryptocurrency transactions.
Ways to Improve Bitcoin’s Anonymity
Utilise Online Wallets
Many wallet services offer users the ability to hide their original owners by storing large amounts of Bitcoin together. However, this is only possible if the services are provided online.
Use Multiple Wallets
People who possess multiple Bitcoin wallets can be likened to those with several identities. With software solutions available, users of cryptocurrencies are now able to manage numerous wallets from just one interface.
Use Mixing Services
Bitcoin mixing services randomize the connection between inputs and outputs to protect users’ privacy. While this does work, it relies on people putting trust in these third-party websites and their operators—which creates a risk of those sites recording user details or running off with all Bitcoin.
As Bitcoin continues to develop, so do the upgrades that help improve its anonymity. Such upgrades will offer ways to mask addresses during a transaction thus preventing any potential links between parties taking part in the exchange.
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