How to improve anonymity in bitcoin network

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How To Use Bitcoin Anonymously

Owner, Editor, and lead writer for Cryptorials.

Cryptocurrency writer and trader since 2020.

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Bitcoin has a reputation in the public imagination for being an anonymous digital currency, like an internet equivalent of physical cash, but that is not entirely correct. When used normally, Bitcoin is more of a pseudonymous currency and not an anonymous one.

Anybody can download a simple piece of software and install it on their computer to use Bitcoin. Because it is a decentralized, peer-to-peer system, you do not need to register an account with any particular company or hand over any of your personal details (unless you choose to do so, for example with a web wallet provider). Once you have a wallet you can create addresses which effectively become your identity within the network. This already gives an enhanced level of privacy compared to other digital payment systems, because you can begin using the network anonymously.

There is also another side to Bitcoin, however. Because transactions must be confirmed by the network, and transaction history shared between all participants, there is a public record of all transactions which anybody can access. In fact, this is really what the ‘blockchain’ is – a shared public record of everything which happens on the Bitcoin network.

So, even though your personal identity as the owner of a wallet may not be public knowledge, all of the transactions you are involved in are public knowledge. This can be a problem for the privacy conscious user, not least because there may be other ways that an observer can link the wallets you use to your personal identity.

For example, most exchanges for buying and selling digital currency are centralized service providers who require at least some identity information from their customers before they can use the service. This is just one example of a service which uses Bitcoin but also requires identity information; there are many others, from casinos to online shopping sites.

By analyzing the activity which is visible to anybody on the public blockchain an observer may well be able to link your personal identity with all of the wallets you use and therefore your entire transaction history. In a way, this makes Bitcoin even less private than a bank account.

Fortunately there are things you can do to improve this situation.

A Beginner’s Guide to Using Bitcoin Anonymously

Basic Protection: Disposable Addresses

Many beginner’s will download their wallet software, create one or two address, and then keep using those addresses for an extended period of time. If you want privacy, then that is not the best way to use your wallet. The more you use an address the easier it is for an observer to build up a profile of your activity, whether for advertising or more sinister purposes, and even to link that activity to your personal identity.

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Bitcoin addresses are not meant to be permanent locations for everything you do. Instead, it will enhance your financial privacy if you view addresses as disposable invoices – each time you are going to receive a payment you should create a new address specifically for that purpose, and then never use that address again afterwards. If you have a desktop wallet on your computer then you should be able to create any number of addresses with no problem, and no matter how many you create all of your old addresses will still be able to receive payment in case somebody sends you money using an old address they have on file for you.

Most wallets today will take care of this for you, automatically creating a new address each time you want to receive a payment, but it doesn’t hurt to be aware of this issue.

For additional considerations in choosing which wallet software to use please read: Anonymous Bitcoin Wallets Explained.

Bitcoin Mixing

(For a more detailed look at mixing, along with a complete step-by-step guide, please take a look at another of our articles: How to use a Bitcoin mixer / tumbler)

You can further enhance your privacy by using a mixing service. You can use this when you send a payment to somebody, when you are sending coins to your wallet from the site you bought them on, or you can even send money to another address you own through a mixing service in order to ‘launder’ it. This works by simply mixing up your coins with a large number of other coins from other sources before sending them out the other side. By doing this, it becomes difficult or impossible for an observer to link specific payments into the mixing service with specific payments coming out of the mixing service.

One popular and reasonably priced mixing service is offered by Best Mixer, who also have a dedicated TOR based service, but there are also many others about so if you like to shop around then a bit of Googling may be in order – just be careful to check for review though, because there are a couple of scam sites out there which claim to be mixers but actually steal your coins.

Buying and Selling Bitcoins Anonymously

If you want to make sure that your financial activities with Bitcoin cannot be connected back to your ‘real world’ identity, then you may well be wondering how to buy and sell Bitcoin anonymously.

It is when buying your coins that you are most at risk of your digital activities being associated with your personal identity, as many sites require you to verify your identity and provide ID documents in order to make a purchase. This is to help them to avoid prosecution under money laundering laws. So if you want to stay anonymous when using bitcoin this is an important part of the process.

If you cannot arrange a private deal using the methods below then you can buy using any other method and use a mixing service to transfer coins to your wallet. This will usually be enough to protect your privacy, although it isn’t quite as good as not revealing your identity anywhere in the first place and has a small cost.

Here are some instructions on how to go about arranging private deal to buy and sell coins:

#1 Using a peer-to-peer exchange where you can buy and sell with other individual users rather than a company will provide you with a better level of privacy than using a central service.

Here are some example of exchanges where you can buy and sell without providing personal details or without verifying those details (meaning you can use a false name) to the website:

Bitsquare: This is an entirely decentralized exchange, in which you trade directly with another individual without needing to go through a central service provider. You download a piece of P2P software rather than going to a website. When you open Bitsquare it creates your own ‘hidden service’ on TOR with your own .onion address, routing everything through this well established privacy service to hide your IP address – which can be used to identify you. There is no registration and no need to provide even a username. You do, however, need to provide a small security deposit of 0.01 bitcoin which you get back when you have made a trade or if you cancel your offer, so if you want to buy your first bitcoin then you will probably need to get some through one of the other options first. I personally rate this as the best method to buy and sell bitcoin anonymously, but the fixed fees mean that it is expensive for small amounts.

LocalBitcoins is one very popular peer-to-peer service for buying and sell coins, which operates in many different countries around the world. When using this site you have the option of providing identity information or not. Other users will also have the option of dealing with anonymous users or requiring identity information. Many users will require some kind of identity information, either through the site’s own ID verification system or privately over chat in order to protect themselves against both fraud and government investigation. But it is still possible to arrange anonymous trades through this method.

MultiSigna As the name implies, this exchange uses multi-sig technology for all exchanges, meaning that you do not need to trust your coins to the exchange for safe keeping, or rely on the exchange to keep their own internal books accurate – everything is on the blockchain. As the users of defunct exchanges like Mt Gox will attest, this is a big bonus in terms of security, and also makes them more decentralized and directly peer-to-peer than other options. The fees start out at the standard 0.5%, but if you are a regular trader and progress through the ‘user levels’ you can take advantage of reduced fees.

Coinffeine is not only peer-to-peer, but is also a decentralized exchange. Currently the only fiat payment method is OKPay, which has its own identification requirements, but you do not need to share personal information via Coinffeine itself and additional payment methods will be added in the future.

#2 When making a purchase on LocalBitcoins, users who are particularly concerned about their privacy should consider making payment in cash. This is particularly important if you are making a high volume of purchases because the volume alone may trigger a deeper investigation by your bank – for smaller amounts its less important but may possibly be preferable to some users. There are two ways to do this: an in-person trade where you meet up with somebody (often requires a larger purchase to make it worth their while coming to meet you), or ‘cash deposit’ where you go a branch of the sellers bank and deposit money directly into their account. Once you have signed up just click ‘buy bitcoins’, then underneath the list of the top offers you will see a link which says ‘Show More’ – this will show you a list of payment methods to choose from so that if you then click ‘cash deposit’, for example, you will see only offers from users wanting to sell you coins through this method.

#3 There is an ID verification system on the LocalBitcoins site, but its use is optional. Some sellers will require this, others will not. Some sellers may also ask you to send them a copy of your ID through a private message (although if you can make a cash trade either kind of ID requirement is less likely). Generally, providing your ID to an individual is better than uploading it to the main site, but some people may still be uncomfortable with this. Each seller should list their particular requirements within the advert, and you can also send them a message before opening a trade to get more information about their policies, so it is not difficult to ‘shop around’ for the right seller. Remember, however, that the offers listed here are constantly changing as different users go on and offline, so if none of the listings for your chosen payment method suit your needs it may be worth having a little patience and checking back later.

Stealth Addresses

Stealth addresses are a reasonably new feature which allows users to generate a new public address to represent any regular Bitcoin address. This means that you can then send money to this new stealth address without anybody knowing the true destination of the funds. You do need a wallet which supports this feature in order to use it, and at the time of writing it has not been widely adopted. If you want to give it a try then Dark wallet is a great place to start – its a browser wallet which works as an extension for Google chrome and includes stealth addresses as well as other privacy features.

Taint Analysis

If you have used a coin mixer then you can check how well its privacy services are performing with a taint analysis. This shows which addresses have sent coins to your address and is a good way to see whether mixing services are performing to your expectations. There are plenty of different service out there, so if one is working well you can always choose another.

You can perform a taint analysis using the Blockchain website. Here is an example link, just replace the BTC address with your address in the url to perform your own taint analysis: https://blockchain.info/taint/1dice6GV5Rz2iaifPvX7RMjfhaNPC8SXH

This will perform a kind of forensic test to see which addresses it thinks probably did send coins to the address you are checking. You can, for example, enter the address given to you for a marketplace site to check whether any observer would be able to tell whether your personal wallet sent coins to this address. Ideally you would want your personal address not to show up in the list at all when you do this kind of search, or at the very least you would want it to come up with a low taint % – meaning an observer could not say with any high degree of confidence that there was a link between the two addresses.

Anonymity of Bitcoin Transactions: How to Keep Your Operations in Secret?

Initially, cryptocurrency transactions are not anonymous despite the fact that this type of digital money is decentralized. Staying anonymous in your bitcoin transactions might be tricky, since you often leave some digital footprints behind you.

All transactions are recorded in a blockchain (public register). In fact, they are not actually linked to user’s identity. Your name, address or email cannot be seen in the recorded information, but your personality can be tracked by IP or even a private wifi connection. Well, even if you do not use cryptocurrency for some illegal aim, you may be willing to have your operations secure.

Bitcoin transactions are not considered as anonymous by default. But don’t worry, there are some methods to keep your identity in secret. Here are some tricks you should try.

The best tricks to make your bitcoin usage anonymous

· Tor/Onion router

Tor is a community that works to ensure anonymity in users’ online activity. You can take advantage from their browser and connect to bitcoin network with its help. This way you will make your transactions safe and encrypted.

Tor works as a system that connects a large amount of computers from all over the globe. The principle of its work is simple – it takes the internet traffic from one computer and routes it to another one. Therefore, the real traffic’s way is impossible to pinpoint. It encrypts your IP address from which you make a transaction and helps you keep your activity in secret. However, there are some bitcoin platforms that make Tor useless (CoinBase, for instance). So make sure that you stick to those that support Tor or a VPN (like BitSquare or LocalBitcoins).

Tor can be used on most devices however if you have Windows on your computer, then you can connect to the network using the standard 9050 Tor port.

· Mixing

All bitcoin transactions are recorded in a public blockchain and every member of this network can learn the origin and destinations of your money. To hide your identity, you can try bitcoin mixer.

Bitcoin mixer allows breaking this traceability. It swaps coins between addresses of the same amount or creates temporary addresses, hiding the trail of your transaction.

Here are some websites that provide bitcoin mixing:

Mind, that this services are not free.

· Logless VPN

VPN (virtual private network) is a network that keeps the history of your operations anonymous. This service encrypts your traffic and routes it between other servers before it reaches the final destination. Therefore, it becomes difficult to identify your identity. If you connect a logless VPN to your bitcoin wallet, you will reach privacy in your operations. Here are some websites that provide logless VPN services:

· Face-to-face cash transactions

Face-to-face bitcoin transactions may be another anonymous way to deal with your digital currency anonymously. There are services like LocalBitcoins that provide such option.

Here are some instructions:

  • User Tor or VPN when accessing LocalBitcoins or other similar site
  • For registration, make sure to use a fake name and email generator
  • Check seller’s/buyer’s feedback and reputation rate
  • Use public phone to contact seller/buyer
  • Choose public place for meeting
  • Make sure not to use anything that may give out your identity, even your car

These steps will help you get your cash as safely as possible.

· New address

Most bitcoin wallets allow generating a receiving address every time you make a transaction. Also, every time you get bitcoins from others, you may use a new address, too. This change confuses newcomers sometimes: they wonder why their address is changing all the time. However, knowing how to deal with this function, you may create as many addresses as you want and therefore make your transactions encrypted.

As you already know, blockchain is 100% transparent and anyone who knows your address may check your spending habits and your balance. If you want to ensure anonymity, do not reuse the same name.

Being a relatively fresh technology, bitcoin still has a long way to go. Its rivals – dash and monero – are designed to be anonymous at the protocol level and we hope this will motivate bitcoin to make anonymity a common practice for the transactions inside its network.

For today, bitcoin cannot provide users with anonymity. However, as you see, there are ways to use bitcoin safely and anonymously. The solutions listed above will help you keep your transactions in secret. Use these methods to make your operations absolutely safe.

Does sending from a green address improve my anonymity?

If I am interested in improving my anonymity when dealing with a merchant, does sending from a Green Address help?

My proposed steps for buying from a merchant as anonymously as possible would be:

1) Send coins to InstaWallet (connecting to InstaWallet through Tor)

2) Send coins from InstaWallet to merchant using InstaWallet’s Green Address feature.

My theory is that the Green Address would make it much more difficult for the merchant to determine my identity, compared to sending the coins directly from my personal wallet. If I send the coins directly from my wallet, the merchant could likely trace the coins back to the exchange where I originally purchased them, and possibly issue a subpoena to the exchange (which likely knows my identity). Whereas, if I send the coins via a Green Address, the merchant could not trace the coins upstream at all – even if they issued a subpoena to InstaWallet, there should be no way to determine the original source of the coins.

Is my theory correct? Do Green Addresses help improve anonymity?

3 Answers 3

No, your theory is incorrect. If anything, the green address makes it easier to trace.

If I see a transaction from an Instawallet green address, I subpoena Instawallet and ask them who commanded them to make that transaction. Boom, they found me.

If I don’t use a green address, how can they tell the coins came from Instalwallet at all? How would they even know who to subpoena?

If I send the coins directly from my wallet, the merchant could likely trace the coins back to the exchange where I originally purchased them, and possibly issue a subpoena to the exchange (which likely knows my identity).

So what? If some dollar bills were used to buy drugs that I withdrew from an ATM machine, what does that tell you? And how would they trace the coins to the exchange exactly?

Whereas, if I send the coins via a Green Address, the merchant could not trace the coins upstream at all – even if they issued a subpoena to InstaWallet, there should be no way to determine the original source of the coins.

I don’t follow your reasoning. They subpoena Instawallet and ask them which user commanded that transaction through their green address. They identify you. They’re just saved the hard work of trying to trace the coins to an exchange.

It’s pretty much academic anyway. There’s no good way to tell a sham transaction (where the sender and recipient accounts are controlled by the same party) from a real one.

No

I also thought your way but under the false assumption that Instawallet maintains many small wallets unless you ask them to pipe your money through a green address:

If you use Bitcoin Spinner only, each trading partner will see exactly when you send and receive bitcoins as you will have one address only.

If you use the Satoshi client, your trading partner can guesstimate which addresses belong to your wallet. If one output is worth some round $$ value, the other output is the return address. If there are several inputs, these also belong to your wallet (true for 99.9999% of all transactions), etc.

If you use Instawallet with green addresses, a trading partner will not know much about your wallet but may ask at Instawallet to find the input to do the Satoshi client analysis once he has this info + he might get your IP address (ok, you use tor, but for other readers this point is relevant).

If you use Instawallet without green address, a trading partner might find evidence that links your transaction to Instawallet but again he would have to ask Instawallet to find out details as your charging address is not what you pay from later. Instawallet uses old coins to pay, so when you receive coins and send them on, this is not done from the same address, regardless of your choice to use a green or not green address.

If you are not worried about subpoena, hosted wallets without registration like Instawallet provide more privacy than your own wallet as they are much busier and don’t connect inputs from one person with the outputs of the same person. This connection is the book-keeping done on the hosted wallet in privacy.

DISCLAIMER: Never ever trust a hosted wallet that has your private keys with your money. They will run with your money or get hacked.

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