Bitcoin & Privacy: What People Need To Know

Online transactions worry a lot of privacy advocates. Unlike offline transactions where people can just pay with cash, payments made online are recorded.

With strict laws on money transfers in general, mostly to avoid fraud and money laundering, a determined investigator would be able to know exactly what a person has purchased recently. This can be rather embarrassing for some people who wish for some of their purchases to be private. Privacy advocates also worry that such an invasion of privacy can have repercussions in the future.

One of the reasons for Bitcoin’s popularity is the fact that a lot of people think that it can allow people the chance to avoid such restrictions. This is why Bitcoin was a popular medium of transaction with the underground website Silk Road and is still used in some less-than-legal dealings. However, this idea of full anonymity is not entirely failproof.

How Bitcoin privacy works

To understand why a lot of people think that Bitcoin can provide people with privacy in their transactions will require a simple introduction on how Bitcoin transactions work.

The Bitcoin protocol consists of a series of transactions. These transactions have different kinds of data in them. Included are transaction inputs and transaction outputs. Inputs are the Bitcoin addresses used to send Bitcoin from. These can only be sent using the private key associated to that address. Outputs refer to the receiving addresses. Transactions are usually made up of multiple inputs and outputs.

People assume that Bitcoin transactions are private for several reasons. First, transactions are not associated with a user’s identity. As long as a user has access to the address, they can send Bitcoin anonymously to another Bitcoin address.

Second, Bitcoin addresses are not linked to any real identity. Such addresses can be made easily with no requests for personal information required. Finally, Bitcoin transactions go through a lot of random nodes in the Bitcoin network.

Is it really private?

The problem with the idea of Bitcoin privacy is that one of the foundations of the Bitcoin network is that all transactions are transparent. The network has a public ledger to track all transactions. A dedicated investigator can take a look at it and check for patterns. With a set of transactions coming from a single address, a smart investigator can usually trace them back to the account’s owner.

Additionally, a careless Bitcoin user may end up associating their real identity with their Bitcoin wallet address, making it easier for those looking for them. Overall, Bitcoin is not the magical solution to online privacy.

The options out there

However, it is possible for smart Bitcoin users to ensure that their online transactions are private. One method is to use TOR or other methods to hide IP addresses.

Bitcoin transactions that hide their IP cannot be traced to their point of origin. Another method is to create a new address for each transaction. Creating a new address for each transaction makes it harder to link addresses to real identities. Using mixers is also an excellent solution. Coin mixers scramble the inputs and outputs of several users into a single transaction, making it hard to trace the transaction.  With the right precautions, Bitcoin users can achieve privacy. However, it will take some effort to really get true privacy.