Is Bitcoin Anonymous?
Yes and no! Bitcoin, and most other cryptocurrencies are pseudo-anonymous. What does pseudo-anonymous mean? This means that most cryptocurrencies are not anonymous, but they have characteristics that provide for some form of anonymity. It is a popular misconception that Bitcoin and many other cryptocurrencies are anonymous.
Bitcoin is an open system where everyone can see every address and every transaction. Imagine a typical transaction where one person sends Bitcoin to another person This transaction can be viewed on the blockchain.
Since the blockchain is an open system, the coins can be traced to see where they came from, and can be followed to see where they are going.
This brings us to the topic of Blockchain Analysis. Companies exist today whose business model is to surveill the blockchain and provide AML (anti-money-laundering) services to exchanges, law enforcement, and other businesses.
The idea that Bitcoin and other cryptos are anonymous comes from the fact that addresses are not associated with any personally identifiable information directly on the blockchain. Anonymity becomes broken when coins are traced, or followed, to an endpoint where the user provides their information to a service, like an exchange.
To better explain this topic, let’s look at a quick example. someone named John receives their paycheck in Bitcoin. John’s boss purchases the Bitcoin from a popular exchange. At this point, Blockchain Analysis can see that bitcoin was acquired from the exchange and was sent to an external wallet. However, they do not know for certain that John is the owner of the coins now. If John spends his coins, Blockchain Analysis can follow the coins and find out where they sent them, and use this information to find out who John is.
The blockchain is full of data and Blockchain Analysis companies track coins 24/7/365. By following the coins, these companies can get a good idea of who owns which coins, and link them together. They are constantly trying to find and link addresses to individuals and organizations
Can you be Anonymous with Bitcoin, Ethereum, or any other cryptocurrencies?
It depends on how you use your coins. Bitcoin and other cryptos do not store your personal data. Your personal data is stored by businesses and service providers. The moment you send cryptocurrency to a business that has your information, Blockchain Analysis firms can trace the blockchain to find all your associated transactions. The only way to be anonymous with Bitcoin is to never interact with any business or service provider that requires personal identity information.
Tools also exist that claim the ability to provide more anonymity. These are commonly called Mixers, and they work by mixing coins from multiple sources together, then redistributing them in an attempt to prevent blockchain analysis. However, Blockchain Analysis firms today claim to be able to de-anonymize most mixer transactions.
Are any cryptocurrencies anonymous?
Yes, Monero is the best example of a cryptocurrency that is truly anonymous. Monero provides anonymity by default. Unlike other blockchains, you cannot look on the blockchain and follow transactions to addresses. This makes blockchain analysis very hard.
There are other cryptocurrencies that have privacy features, like Zcash, however the privacy is not on by default. The main blockchain is open and transactions can be followed. Zcash provides the ability to opt-in to anonymous transactions. On the Zcash blockchain one can follow transactions as they go into, and when they come out of, anonymous transactions – but while in anonymous mode transactions cannot be followed.
Privacy and anonymity is an area of blockchain that is constantly being worked on. New features are proposed and tested all the time. The bottom line – if you want to be anonymous when using cryptocurrency, use Monero.