Understanding Bitcoin Privacy
People often view Bitcoin as being a fully private way of transferring money, but in actuality, the sheer transparency that it offers can mean that privacy is compromised.
Bitcoin may, in fact, be the most transparent payment system the world has ever seen, but even still, there are ways in which you can protect your identity from being linked to all your transactions.
It should be noted that it is entirely your responsibility to uphold your own privacy by following best practices.
Bitcoin and IP Addresses
The fact that Bitcoin is peer-to-peer means that it is entirely possible for a person’s IP address to be logged when they make a transaction.
It is worth considering the possibility of hiding your IP address with systems like the Tor Network, i2P, or a simple VPN. If you decide to use a VPN, be mindful of how much protection they offer, as some services provide different levels of anonymity.
Traceability Through Bitcoin
The transparency that Bitcoin offers means that any and all transactions can be traced and searched through. Every record of every transaction is kept on the public blockchain.
This means that when you buy something with Bitcoin anybody can see it; all they need is your wallet address. Most people are not accustomed to this type of transparency as transactions are usually seen as a private act.
When you use your Bitcoin address for a transaction the recipient can see all of your transaction history. This is because everything on the blockchain is immutable and fully unchangeable. All records stay on the blockchain forever.
This does not necessarily mean that all transactions can be traced to you, but it does mean that with enough time and research it would not be too hard for somebody to work out your identity simply from your address.
There are some ways to keep your privacy but it must be noted that just because something is not traceable now does not mean it will always stay untraceable. The Bitcoin developers constantly provide updates to the network and occasionally those relate to the transparency of the blockchain.
Utilising New Addresses for New Transactions
One simple way of keeping your anonymity is to use an entirely new address for every transaction you take part in. This way nobody can link every one of your transactions to the same address. This is especially helpful if you want to keep payments separate.
If you care about your privacy then you should not publish your Bitcoin address online or out in the open world, as anybody would be able to access your history. Of course, there will be times when this is unavoidable (such as if you are accepting public donations) but in those cases, privacy may not be of concern.
Make note that if you were ever to move your Bitcoins to an address which you broadcast to the public then everybody would be able to see where you sent them from.
The Future of Privacy
The Bitcoin Core developers have been looking into increasing anonymity and privacy controls for those who want it. In the near future, we could see wallets which allow users to have a higher command of their privacy, for matters of both security and comfort. Features such as adding random user transactions together are being worked on and researched extensively.
Mixing Services and Tumblers
TSome websites offer mixing, or tumbling, services which offer an additional level of privacy when sending payments.
Mixers and tumblers take your Bitcoins and give you coins from various other people, meaning that the money is no longer tied to your previous payments. Most of these services take a small fee for this (in addition to the standard Bitcoin transaction fee).
The legality of using these services is something to keep in mind as it is a grey area in many locations. This means that the law could easily change, therefore making your actions frowned upon.
An important risk factor of these services is that you need to trust a third party with your bitcoins in the hopes that they will perform the action; numerous people have been scammed by independent mixers in the past.
It also becomes more cumbersome to use mixers when handling large quantities of money; they are more effective with low amounts. BitMixCoin is one of the leading tumblers at the moment, but note that this could change at any moment as mixers and tumblers are notorious for scamming.