Now that people are starting to accept bitcoin and cryptocurrencies as the new trend in currency, they begin to wonder: are bitcoin transactions truly anonymous? If I send John Doe BTC, could this be traced back to me?
Well first, a bitcoin wallet address is not connected to the personal information or identity of the user, unlike a traditional bank account or payment system. Any customer can create a completely new and random bitcoin address that has its very own unique private key. There is no need to submit any personal information to a third party party source for verification, like when you apply for a credit card.
On top of that, the transaction itself is not in anyway tied to the identity of the customer either. Anyone can send bitcoins from an address (assuming they are the private key holder) to any other wallet address without the exchange of personal information, only the BTC amount. These types of transactions carry the same level of anonymity as a cash transaction in the sense that the receiver does not need to know the identity of the sender, only their wallet address.
Within the peer-to-peer network for bitcoin, transaction data is transmitted and passed along by nodes to a random set of nodes. Although nodes are connected to each other via IP-addresses, it is not entirely clear to the receiving node whether the incoming transaction data was created by the node it is directly connected to or if that node simply just passed on the data.
This seems like a pretty airtight system, right? However, there are some ways around this that could de-anonymize the customers participating in these transactions.
For example, if a hacker somehow gained access to a means that would allow him/her to connect multiple nodes within the blockchain network, the extracted data from all of the connected nodes could help pinpoint where a transaction originated from, thus leading to a specific user.
Additionally, it is possible for a bitcoin wallet address to be linked to a customer’s personal identity if they use their personal information in combination with their wallet address in some way.
But more importantly, all transactions within the blockchain network are completely transparent, allowing multiple wallet addresses to be “clustered” together in the network and linked to a single user. So if one of the clustered addresses can be traced back to a specific customer, including their personal information, that transaction (and all the other clustered transactions) lose their anonymity.
These are the extreme cases, but people are working to regain the true private aspect of bitcoin and the blockchain network. Using TOR (or other similar methods) to mask IP-addresses is the most simple approach. If transactions are processed over TOR, there would be no way to link nodes by their IP-addresses.
A more advanced technique would be to use mixers, which essentially merges all inputs and outputs to and from several users into a single transaction, skipping over the assumption that all inputs belong to one single user, thus harder to distinguish the path of the transaction.
But overall, the privacy aspect of bitcoin and blockchain remains somewhat of a grey area — it is by no means completely anonymous, but also not completely (or easily) traceable, depending on how much personal information a bitcoin customer reveals in their transaction.
Regardless of anonymity, bitcoin transactions are still easier and more immediate than bank transfers, and therefore making them a popular choice when an individual needs to send funds rather quickly. Globally, we are now in a phase where we are shifting towards a cryptoeconomy, as digital currency is becoming more and more accepted as forms of payment (and the new hot investment trend). At Bitmoney.eu, customers can purchase up to 200 EUR worth of bitcoins without providing any information. For providing only their name and phone number, customers can purchase up to 500 EUR worth of bitcoin. Bitmoney.eu is trying to maintain this level of anonymity for its customers.
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