The anonymity of cryptocurrency is legendary. However, most of them, including the idea of an untraceable cryptocurrency, turn out to be myths in reality. People are mistaken about the anonymity of Bitcoin, forgetting about some of its important features. Also, technology does not stand still, and therefore methods of de-anonymization on the Internet are also being improved.
A little history about Bitcoin anonymity
Three years after the introduction of Bitcoin, a report was published in the media entitled “Bitcoin Virtual Currency: Unique Features Make It More Difficult to Fight Illegal Activities.” It was developed by the FBI and dealt with the anonymity of the first cryptocurrency and its attractiveness for criminal activities. The FBI then saw exclusively the negative sides of the use of currencies, which can be explained by the specifics of their work. At the same time, the report stated that despite its apparent anonymity, Bitcoin cannot be called untraceable. When compiling the report, experts referred to a corresponding study that was conducted at University College Dublin.
In addition, it is worth paying attention to the White Paper of Bitcoin itself, compiled by Satoshi Nakamoto. It does not say that the blockchain is completely anonymous and untraceable. It only indicates the anonymity of public keys. Nakamoto himself wrote that it is possible to maintain confidentiality by breaking the flow of data elsewhere, while maintaining the anonymity of public keys. In other words, as long as the anonymity of the public key is maintained, the confidentiality of its owner is maintained.
A striking example of the limitations of Bitcoin privacy is the story of Ross Ulbricht and his Silk Road website. The owner was known online as dread Pirate Roberts. At one time he created a black market that was sensational throughout the world. To bypass traditional financial channels, which are easily tracked, I used Bitcoin, hoping for its complete anonymity. Cryptocurrency also gave access to those who had restrictions in financial services.
However, it was Bitcoin and the blockchain that helped catch Ulbricht. Thanks to blockchain, FBI specialists were able to link transactions to servers that they had previously seized. In the public ledger, they found more than 3,500 transactions between the servers and Ulbricht’s personal laptop, which was seized by the FBI.
In this example, it becomes clear that anonymity is out of the question when it becomes possible to match public keys with a specific person.
Reasons why Bitcoin is not anonymous
Regardless of experience with cryptocurrency, many people consider Bitcoin anonymous. After all, when creating a wallet, no personal data remains. However, the Internet has many facets from which you can get to the original source.
Bitcoin is not anonymous. This is confirmed by the story of the creator of Silk Road. You can find a huge number of similar cases on the Internet, but this is just one of the most high-profile. The reasons for the lack of 100% anonymity are the following:
- Publicity of transactions
- Eternal storage of data in the blockchain
- Not everyone supports anonymity.
- Third-party services and sites.
- Anonymity is not needed by states.
- Deanonymization services.
- Digital footprint.
We will look at each of these points separately and in more detail.
Publicity of transactions
Any operation on the Bitcoin blockchain is public. This is due to the fact that transaction data is written directly into blocks, which are transmitted along the chain of nodes.
Since the data in the blocks is not encrypted, anyone can study them. Note that the transaction specifies the address and amount of the transaction. The time of its implementation can be easily determined by the moment of detection of the block that contained the operation.
Eternal storage of data in the blockchain
The Bitcoin blockchain has a distributed ledger. It records all network data, including transactions. It is impossible to change or adjust them, since it is necessary to control more than 50% of the nodes of the entire network.
The completed transaction is permanently entered into the register and is not deleted. Therefore, transactions can be viewed literally from the moment the blockchain is launched.
Not everyone supports anonymity
Most Internet users do not care about their anonymity, happily publishing personal information about themselves and their loved ones, revealing their place of residence, appearance, etc.
The situation is similar with blockchain. Users publish their public wallet addresses to receive transfers for various purposes. This is especially popular among bloggers. As a result, the crypto wallet is completely deanonymized. And through it you can reach the person of interest if a connection is discovered.
Social life on the Internet is just one of the options for the situation. Now a huge number of users trade cryptocurrency, make payments and do not think about the fact that they are completely revealing their identity. How it’s done?
- Centralized exchanges. Binance, OKX and other similar sites require verification. The user is required to provide personal data. When making a transfer from his wallet to the exchange, he automatically shows the connection.
- Exchangers. This is a bit more complicated. No personal information required. However, the user often provides an email address to receive the status of the exchange request. You can calculate it from it.
- Purchase through messengers. Telegram is protected in many ways. However, in theory, you can also find out all the necessary information through it.
- Purchase through payment systems, electronic wallets and bank cards. At all these points, your personal information is disclosed, which can be used to contact the owner of the wallet if not to use a bitcoin tumbler.
90% of Bitcoin users do not care about their anonymity. Therefore, finding out their identities is quite possible.
Third-party services and sites
If bitcoin were used simply for storage, everything would be simpler with anonymity, and a bitcoin mixer Tumbler.io would not be useful. However, many people are buying bitcoins anonymously and actively trading them, as well as using them to pay for goods or services without using a bitcoin mixer. As a result, various third-party sites and services are used that store your personal information.
Moreover, this applies not only to data such as bank cards, residential address, but also cookies, which many people do not think about.
Most services are centralized and subject to one jurisdiction or another. They may transfer all personal data to law enforcement agencies. True, this is not so scary, since most cryptocurrency users comply with the law. The problem is that this data can be stolen by hackers by breaking into the system of a particular service. As a result, he will have the database and it is unknown what he will do next.
The state does not need anonymity
Some countries have recognized Bitcoin as a means of payment and implemented it at the state level. One of these is Japan. However, most believe that it is too risky and relates more to securities or property.
Moreover, in 90% of cases, attackers prefer to have funds in Bitcoins. Its pseudo-anonymity is harmful, since it requires the use of various methods to track funds and punish criminals. Hence KYC on exchanges, as it greatly simplifies the search. In other words, governments are doing everything possible to de-anonymize the first cryptocurrency and they are succeeding.
As mentioned above, all transactions are recorded on the blockchain. Tracking them is quite easy, especially if you use browser services, for example, Chainalisys.
The point is that you can specify transaction data and trace an item from wallet A to wallet B. Analytical service specialists are able to track transactions until identification is made. They often work with law enforcement when any network, cryptocurrency, or blockchain-related system is hacked.
Every year the list of tools for analyzing transactions in such services becomes more and more extensive. Some not only find out the addresses of operations, but also external information that is associated with them. If somewhere the address was exposed with personal data, they are able to establish this.
When visiting the Internet, every user leaves a digital trace. This may include cookies on the site, emails, and data that remains on various sites. For those involved in cryptocurrency transactions and seeking to minimize this footprint, a bitcoin tumbler can be used to obscure the linkage between their wallet addresses. A common question arises: is Bitcoin anonymous? A digital footprint allows you to track a person’s actions on the Internet.
Everyone knows the saying that “the Internet never forgets.” All your data is stored in one form or another. You may not even be aware of this. This is easy to check, not even using your real first and last name, but thanks to the nickname that you constantly use. The search engine will give you so much information that you will be surprised.
The digital footprint is a reliable source for searching personal information and identifying the owner, his interests, activities, etc.
It is now possible to find out the IP address of a crypto wallet. Using it you can determine not just your name, but also the actual location from where you logged into the system. This is especially true for centralized wallets in the form of applications and websites. They remember logins from users’ personal devices.
Is Bitcoin Anonymous? Determining the Identity of Bitcoin Owners
When a transaction occurs, the user leaves 2 types of traces: inside the blockchain and outside it. In the first case, the connection is shown only indirectly with the direct owner of the address. However, it includes data that allows you to associate user transactions. The second type of traces makes it possible to directly establish the identity of the operation.
Beyond the Blockchain
Transactions are always accompanied by a specific purpose: transfer to another user, payment for goods or services, conducting an exchange or transaction on a crypto exchange. Regardless of this, the second party has certain information about the user that does not concern the blockchain.
If you wish, you can find out which bitcoins were used and between whom the transaction was made. At the same time, it is possible to find out your identity even if the third-party service did not receive any personal transaction from you. This is due to the fact that each device has its own IP address. It is unique and represents a physical location.
Finding out the IP address is not a problem now. There are many ways to find out. Bitcoin transactions that are sent through full nodes can be intercepted to analyze network traffic. As a result, the interested party will be able to establish a specific IP address.
Note that some operators providing cryptocurrency wallets, for example, mobile ones, broadcast transactions through their own servers. The latter immediately see the IP address of the user who sent the operation. They also have a complete transaction history. A similar situation occurs with hardware wallets.
Using a public Wi-Fi network will not help in this matter, since programs with your personal data are installed on the device. They automatically associate the account with the IP address used. The situation is similar with the use of accounts on various sites.
In addition, we have already written about cookies. They are used by various online service operators to track user activity on various websites. Cookies are a unique browser fingerprint associated with an IP address. The situation is similar with the MAC address that is received by the Internet provider. With certain techniques it can be associated with a specific user.
Directly on the blockchain
Information on the Bitcoin blockchain is quite limited. To analyze it, you can use one of the Bitcoin browsers. Each block contains a certain number of transactions.
By choosing one of them, you can safely view the details. Inputs and outputs are indicated here, identified by identifier. The latter is connected directly to the Bitcoin wallet that launched the transaction.
In addition, you can find out the approximate time it takes to complete the operation. It is indicated in the block header. The system also stores the addresses to which coins were sent and their amounts.
The transaction itself does not have a set time. However, there is a mark directly on the block it is included in. They are not 100% accurate. However, miners give an idea of when a block was discovered within a few hours.
In addition, the browsers themselves can provide information about when the transaction was first discovered. This gives a more accurate time for it.
By examining the history of transactions at a specific address, you can find out the hours of activity. With minimal analysis, this will allow you to find out the time zone where the owner of the cryptocurrency wallet address is located.
The address usually means the “number” of the wallet to which the bitcoins should arrive. However, in reality everything is somewhat more complicated.
The address is a cryptographic description of the spending rules for the future when the recipient decides to move their bitcoins. The bottom line is that these spending rules remain secret until the owner starts making the next transaction. Only in this case will it become clear what exactly was hashed.
If the spending rules become known, then you can find out the number of bitcoins directly at the address.
Source of funds
Since transactions show the source of funds, they are interconnected, creating a so-called transaction graph. For example, you send bitcoins to a friend. He will be able to see your inputs just as you saw him when you sent those bitcoins. You will also find out which new address they will be sent to.
There are already databases with addresses that have become not only public on the blockchain, but also with identified owners. Analytics companies collect such data for themselves, searching for it all over the Internet.
Clustering refers to the connection of Bitcoin addresses. It comes in different types. The simplest is to combine multiple inputs into one transaction.
Note that even if the inputs came from different addresses, combining them into one transaction means that they all belong to one specific user.
You can determine addresses when receiving bitcoins. It is enough to set an output that is not related to the recipient. This is what the system will use, as a rule, to return the change.
In addition, there are programs that can help you detect such addresses. For example, they can show them as the last exits in an operation.
There is also another clustering method. It is called “distribution analysis”. It is fairly straightforward and can be accessed with multiple block managers. The point is that the percentage of bitcoins at a certain address that came from another account is calculated. In this case, the system determines whether these addresses are related to each other by a direct transaction or whether a whole chain of operations has occurred.
Clustering also examines transaction amounts or time periods.
Bitcoin de-anonymization: risks for the user
Maintaining anonymity, especially when dealing with untraceable cryptocurrency, is a legal human right. However, this does not mean that attackers strictly adhere to this. On the contrary, there are a huge number of situations online where personal data was published or stolen data was used for personal gain.
Bitcoin is now the most valuable cryptocurrency, and this is unlikely to change in the near future. A huge number of users already have certain amounts in their wallets, and many are interested in buying bitcoins anonymously.
If you have a couple of bitcoins or less, then no one will waste time stealing them. However, with a larger amount of cryptocurrency in the wallet, they attract a certain interest.
Hackers and intruders can track wallets on the blockchain with addresses that store decent amounts of digital gold. They will hunt for it, and therefore use various methods to de-anonymize the cryptocurrency wallet.
After all, the blockchain system cannot be hacked. The process is absolutely unprofitable, as it will require the use of a huge amount of resources. However, for ordinary users it is a completely different story.
It is quite possible to hack a crypto wallet. There are already known cases. The easiest way to do this is with hot cryptocurrency wallets. Attacks are also possible on various services.
However, this also requires certain resources. If the user is careless and reveals some of his personal information, it will not be difficult to carry out an attack against him. There are a huge variety of ways to steal private keys and seed phrases, with which you can gain access to your wallet and take all the bitcoins from there.
Therefore, the consequences of deanonizing your wallet will be sad. Moreover, through such a wallet you can find out its operations and find an address with larger amounts. There will be a chain of break-ins and thefts.
Is it possible to prevent de-anonymization?
The Bitcoin blockchain itself provides a fairly high level of confidentiality for the owner of the cryptocurrency address. After all, it does not carry any personal information.
However, when people ask, ‘Is Bitcoin anonymous?’ the answer is more complicated, especially concerning the IP address. It’s a completely different matter. As we wrote above, with its help it is quite possible to track down a person and get as close to his device as possible.
It is quite possible to prevent de-anonymization if you strictly adhere to cybersecurity rules. Moreover, they should be used not only when working with Bitcoin, but also in ordinary everyday life. After all, the use of personal data by attackers can lead to serious consequences for the victim.
Ensuring Untraceable Cryptocurrency Transactions
The user leaves too much personal information online, from posting a photo from a walk to a comment or review. You can tie everything together in different ways.
This involves not only the IP address, but also even the style of communication and writing texts.
How to maintain your anonymity in Bitcoin?
- Never publish a cryptocurrency address.
- Use a sandbox or virtual machine.
- VPN and TOR are best used together.
- Do not work with exchanges directly, as well as with exchangers.
- Always use a crypto mixer or a bitcoin tumbler during operations.
These 5 seemingly simple steps require constant adherence. If you deviate from them, there is a high chance of losing your anonymity.
Publicity of crypto addresses
It is worth understanding that there are two addresses in a crypto wallet: private and public. The first one is clear: you need to hide it with all your might. However, what to do with the public one if transactions need to be carried out?
There are two options:
- Use crypto wallets that can create many new addresses under one seed phrase.
- Create a new crypto wallet each time.
Keep the main amount of bitcoins in your wallet and never use it to transfer cryptocurrency to exchanges, exchangers or another person.
Use a second wallet for transactions. At the same time, make a transfer from the main one through a cryptocurrency mixer. This will help break the direct transaction by preventing communication between wallets.
Sandbox or virtual machine
This item will protect your crypto wallet from external influence if it is on the device. This does not apply to hardware models. But the point is the same, you are separating your wallet from your everyday life, making it more offline.
This approach minimizes the risk of malicious software gaining access to your wallet, especially if combined with a crypto tumbler.
VPN and Tor
The TOR browser itself encrypts IP addresses and protects against third parties finding out the physical address. However, not all users know how to configure it correctly so that it works really effectively.
With standard settings, it does not provide such high protection. Therefore, it is additionally worth using a VPN. This symbiosis will help protect against third-party surveillance and interference, completely protecting your personal information.
Working with exchanges and exchangers
We wrote above that it is through them that it is easiest to de-anonymize a user. KYC, email, phone number. The hacker can use all this to find out his identity.
Use an intermediate wallet to eliminate communication with the main one. We also strongly do not recommend storing bitcoins directly on exchanges: blocking your account, hacking the site – and you will no longer see your bitcoins.
Cryptocurrency mixer or bitcoin blender performs two main functions:
- They mix coins, replacing some bitcoins with others.
- Break the connection between the transaction and the previous wallet.
This makes it extremely difficult to track the final recipient of the transaction. However, use proven and reliable crypto-sixers with wide functionality. The higher the security, the better.
It is quite possible to use bitcoins in everyday life. There are no special restrictions, since it is impossible to block the blockchain itself. However, keep in mind that when withdrawing bitcoin to a card, there is a risk of encountering interest first from the bank, then from law enforcement agencies.
As we have already said, a small part of the owners of the first cryptocurrency are criminals. Therefore, Bitcoin is suspicious to many.
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