Understanding Privacy: How Anonymous Can Bitcoin Payments Be?

As a payment medium, Bitcoin has given the public an impression of anonymity and privacy since its inception. This currency has been recognized by many celebrities, such as: German politician Franz Schäffler, investor Ashton Kutcher, famous writer and economist David Friedman, financial guru Kevin O'Leary, etc.

Specifically, Kutcher said: “I think the fact that you can use Bitcoin to buy medicine and ammunition is a testament to the currency itself.”

However, the downfall of Bitcoin is also due to people believing that they are just traders hiding behind Bitcoin.

An untraceable payment system is a privacy advocate's dream

Ronald A. Glantz of Pantera Capital said: "Bitcoin is a consensus network that allows for a new payment system and fully digital currency. It is the first decentralized peer-to-peer payment network without user centralization or middlemen. From the user's perspective, Bitcoin can be seen as cash for the Internet."

Glantz used his definition to explain how people can trade digital currencies without physical form through protocols on the Internet. Currency, as defined, is unregulated, and no financial institution can control its price, supply, risk, valuation method and distribution. The notable feature of Bitcoin is that it has no trust, which is determined by its decentralization. So what exactly makes it trustworthy?

This sounds like a perfect anonymous payment method, doesn’t it? Not exactly.

Is your Bitcoin completely private?

Bitcoin is susceptible to several different surveillance methods.

Every bitcoin payment is recorded in a digital public ledger called a blockchain. The blockchain records the transfer of bitcoins between users and links users to their transactions. Although bitcoin wallets have unique coded identifiers, they do not usually point to the identities of the parties to the transaction. People's identities are only accurately linked to their wallets when certain transactions occur.

The main reason there is no privacy using this system is the transparency of Bitcoin transactions. Once an event is recorded, it is visible to anyone and can be easily traced back to an IP address.

Malte Moser from the University of Münster talks about "Anonymity of Bitcoin Transactions" in his article.

“But all transactions in the network are publicly stored in the blockchain, allowing anyone to inspect and analyze them, and there is no real anonymity in the system, and they usually use pseudonyms.”

While Moser only saw the concept in theory, three researchers went a step further and tested the hypothesis. In their research report "A Study of Bitcoin P2P Network Clients", Alex Biryukov, Dmitry Khovratovic and Ivan Pustogarov (researchers at the University of Luxembourg) concluded that linking Bitcoin transactions to user personal information (including IP addresses, names, financial information, etc.) would achieve a success rate of 11% to 60%.

Three researchers have attempted to use a common method to try to bypass the NAT firewall protection of bitcoin users and identify their transactions on the network.

Rather than stopping the practice, the study also suggests that “the use of Tor anonymization services or other countermeasures could cut off attacks abusing Bitcoin from the network.”

The above-mentioned anti-DoS attack mentioned by the researchers abuses the Bitcoin network, usually by crowding the entire blockchain with a large number of small transactions, thereby prohibiting other users from conducting transactions.

Similarly, a forum moderator on the Bitcointalk.org forum also mentioned the same issue:

“Bitcoin is considered a tool with privacy, but the privacy of Bitcoin comes from anonymous addresses, which are fragile and can be easily leaked through repeated use, “taint” analysis, tracking payments, monitoring node IP addresses, network searches, and other mechanisms. Once leaked, it is very costly to recover.

Even the most staunch advocates and crypto currency experts reject the idea as a countermeasure to achieve anonymity in online transactions. Adam Ludwin, founder of chain.com, concluded in his 2015 article: No matter how anonymous Bitcoin is, ordinary users should also realize that Bitcoin is certainly more active than cash.

Ludwin's conclusion can be verified in everyday life by observing the use of Bitcoin and cash. If I buy antidepressants from my doctor, there is no evidence that I have a mental illness except the doctor's prescription (which should be highly confidential information). If I use Bitcoin to buy the same drugs when blockchain is available, it will let the world know that I am truly crazy.

We now know of three ways to kill the anonymity of the Bitcoin network:

1. Since Bitcoin is a peer-to-peer network (vulnerable to hacking), if a hacker is able to connect to the Bitcoin network using a node or computer, then the hacker can extract enough information to decrypt the origin of the transaction.

2. If a Bitcoin wallet has been registered with real personal information, it will be easier for hackers and cyber criminals to find a breakthrough in Bitcoin data.

3. Blockchain transparency allows transactions to be analyzed and linked to the initiator of a transaction.

Ensuring the security of Bitcoin network transactions

Tbiryukov and Co. may have demonstrated with overwhelming evidence that Bitcoin transactions are not private or anonymous, but confusion remains: How do we ensure anonymity on the Bitcoin network?

The solution most researchers, advocates and Bitcoin users suggest is to change your Bitcoin address or use a pseudonym in every transaction. Windows, Mac and some mobile apps like Mycelium, Bitcoin Wallet, CoPay, Bitcoin Core and Armory allow multiple aliases in their interfaces. You can choose to set it manually.

One aspect that has not been explored in the research literature is the use of the Bitcoin network in conjunction with a VPN. A Virtual Private Network, or VPN, is a tool that provides anonymity and privacy, ensuring that even the ISP does not know what I am doing online.

The VPN tunnel ensures that I will be invisible on the Internet while the transaction is taking place, and the encryption technology will ensure that all online data can be passed between me and the VPN server. DoS will no longer work because the hacker will not be able to know my location and network address.

The way it works is that a VPN will invisibly change your location based on the region of the service you’re connected to. So if I’m connected to a VPN server in London, my IP address that appears to other people’s networks will be located in the UK.

Let’s assume I connect to a VPN server in the UK, a country I definitely don’t live in, create a fake (temporary) email address, open the TOR browser and register a Bitcoin wallet using the pseudonym.

Can anyone notice me now?

My personal data, now protected by a VPN (I remain anonymous), a fake email address registered to Victor Von Lichtenstein llanbradach, Caerphilly, New South Wales, UK, I then used TOR to purchase stolen credit card details from hackers and scammers. Now, technically I can empty those credit cards and purchase an entire library of games from a site like GoG.com, download games and play happily without the worry of being delayed or chased by others.

You may hate him, but you could never catch Lichtenstein doing business like this online, at least in theory.

The same cannot be said for purchasing physical goods with Bitcoin, however, as a shipping address solves all the anonymity issues associated with cryptocurrencies. Even using TOR, VPNs and Bitcoin encryption can still leave you with some legal concerns.

Opinion: Anonymous or not?

It is possible to do everything you can to prevent entities from tracking your Bitcoin transactions so that they lose the power to judge you. However, Bitcoin is not technically able to achieve complete anonymity.

Yes, Bitcoin is anonymous and allows for quick and free transactions without revealing too much personal information. But the digital world, or its criminals, will eventually catch up with you.

Using Bitcoin to buy digital goods such as software, books, white papers, reports, databases, and even illegal goods such as credit card information is undoubtedly a good way, but the second you give it an email address means you should change your position.

If I missed a question or you have an opinion, please leave a comment @Ameerrizonline