Generally speaking, Bitcoin is not anonymous, but rather pseudo-anonymous. This is known to most people using cryptocurrencies.
However, many people do not know why Bitcoin is not anonymous by default, and what can be done to establish the user’s identity or, conversely, to increase their privacy.
Essentially, there are three main reasons why Bitcoin is sometimes considered anonymous.
- Unlike bank accounts and most other payment systems, Bitcoin addresses are not tied to the identity of the users at the protocol level. At any given time, you can create a new, completely random Bitcoin address (and private key) without having to provide any of your personal data to anyone.
- Transactions are not tied to the identity of the user, precisely why any user can successfully transfer Bitcoins from any address from which he has a personal key to any other address, no matter where they are. No one needs to disclose any personal information. As in the case of physical cash, the recipient does not necessarily need to know who the sender is.
- Bitcoin transaction data is transmitted and forwarded by the nodes to a random set of peer-to-peer network nodes. Although Bitcoin nodes communicate with each other using IP addresses, they cannot know whether the transaction data they received was created by the particular node with which they entered into communication, or the latter simply performed the function of sending such data.
How Do I Improve My Anonymity?
There is a real race going on regarding the privacy of Bitcoin. Some work towards increasing its anonymity, others on new methods to overcome them. For those interested in increasing their anonymity, there are two working solutions as of today.
- One simple solution is to use TOR or other methods to mask your IP address. If Bitcoin transactions are transmitted via TOR, there is no way to determine where they come from.
- Another great solution is to create a new address for each transaction. By creating a new address for each regular transaction, the user makes it difficult for a hacker to bind the address to a real person, since this would first require, by some criteria, merging such addresses into a group. Some Bitcoin wallet services allow you to change addresses automatically.