You may have heard the phrase, “Bitcoin is not fully anonymous,” and wondered what it really means. When it comes to Bitcoin, the word “pseudonymity” is associated with how it works. Bitcoin pseudonymity explains how the blockchain stores a user’s transactions and how privacy on the blockchain works.
But if you are interested in cryptocurrency, you may need to take time to understand how it works and, most importantly, how to protect your privacy while using it.
Keep reading this post to understand the pseudonymous nature of Bitcoin transactions.
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What Does Bitcoin Pseudonymity Mean?
Bitcoin is one of the most popular cryptocurrencies in the world. All Bitcoin transactions are stored in the blockchain, which is basically a decentralized public ledger. Anyone can access the blockchain and have access to the transactions, which promotes transparency in transactions.
Each transaction is associated with a digital address, which is a collection of alphanumeric characters. Casinos like Ice casino EU that accept Bitcoin as payment leverage this transparency characteristic to promote their customers’ trust.
Bitcoin pseudonymity means that although these digital addresses can be traced to transactions, they cannot be traced to the personal identities of the users. While keeping your real identity private, these wallet addresses can be used to track the course of a given transaction.
The blockchain that records the transactions carried out does not contain any personal details of users and, hence, can not naturally be traced to anyone behind the transaction. This pseudonymous nature of Bitcoin transactions is what compromises its anonymity. That is, real-life information like names does not exist on the blockchain, but if necessary, transactions can still be traced via different means.
Are There Risks Associated With Bitcoin Pseudonymity?
Bitcoin operates on an open blockchain that is accessible to anyone. That means anyone can trace transactions on the blockchain, giving way to one of Bitcoin’s most prized attributes – transparency. However, as mentioned earlier, this quality also sacrifices Bitcoin’s anonymity. This debunks the popular myth that Bitcoin is not traceable because it is. Bitcoin can be traced, though it operates under pseudonymity.
If a person uses the same Bitcoin address for multiple transactions, that address can help anyone trace those series of transactions back to you. Although this does not reveal a person’s real identity, it can pose a threat.
Also, if you purchase Bitcoin on any exchange that follows KYC (Know Your Customer) regulations, your wallet address will be linked to your real identity.
In general, Bitcoin pseudonymity offers users a level of privacy by not linking their transaction addresses to their personal identities. However, this so-called privacy is not rock-solid and can be compromised. Fraudsters can exploit transactions for illegal activities and money laundering. So, users need to be security-conscious when trading on the blockchain.
How To Increase Privacy While Using Bitcoin
It has already been established that Bitcoin is not anonymous, meaning users’ privacy can be compromised. However, users can increase their privacy on the blockchain by following some simple techniques. They are:
- Different addresses for different transactions: One way to increase your privacy is by using different wallet addresses for different transactions. This makes it harder to track your activity on the blockchain;
- Use VPNs: A Virtual Private Network (VPN) masks a person’s internet connection (hides their IP address). This makes it difficult to track their online activities;
- Use Bitcoin mixing services: This has to do with mixing your Bitcoin with that of others. It involves combining several transactions into one large transaction. The effect of this is that the resulting large transaction cannot be traced to the individual Bitcoin wallet address. This is supposed to increase the anonymity of Bitcoin;
- Avoid KYC-compliant exchange: As much as possible, avoid purchasing bitcoin from an exchange that complies with KYC regulations. An alternative is to use peer-to-peer exchanges. These exchanges do not require personal information and only serve to facilitate transactions between users. This increases the level of your privacy, as your transactions cannot be traced to you;
- Use coin control: Coin control is another way to increase your privacy. Although this is usually available as an advanced feature in wallet apps, it allows you to control which coins are spent together by manually managing your UTXOs (Unspent Transaction Outputs). This enables you to be intentional about information on past transactions that you share with others. And in turn, this will reduce the traceability of your transactions.
Note that these actions do not guarantee 100 percent protection from fraudsters or other potential harms, but they can increase privacy and secure your transactions to a reasonable extent.
