One of the most often asked questions when people first learn about Bitcoin is is it anonymous? Surely, since it’s unregulated and from a decentralized network, it should be logical that payments and transfers would be anonymous, right?
Unfortunately, while Bitcoin allows users to have a high level of anonymity, it’s not 100%. Let’s take a look in more detail.
Anonymous vs. Pseudonymous
One of the biggest issues with Bitcoin anonymity is with the wallets, the place where people store their crypto. These wallets can be classed as pseudonymous rather than anonymous. Instead of your wallet being nameless, it has a name, it just isn’t your name.
So, rather than your wallet being under the name Barry Winters, for example, you get a mix of letters and numbers identifying your wallet. This means that your wallet does still technically have an identifying feature, but it’s a pseudonym which does add a degree of anonymity.
If you look on Bitcoin’s official website, you’ll see that they do openly explain this concept. At no point do they try to hide this or say otherwise.
However, too many people still see pseudonyms as the same as anonymous and think their wallet payments can’t be tracked. This is not the case. Wallet payments can be tracked, and pretty easily just because of how the system works.
But this is why fake names/identifiers are used.
Anonymity on the Blockchain
In simple terms, the blockchain is a public ledger where records are kept on when each Bitcoin comes into circulation, where it goes, and who uses it. While there is much more to it than that, for the purposes of this, we’ll keep it short and sweet.
So, since this ledger is public, anyone can see these transactions. Although the real identity of anyone behind the transactions is hidden, their wallet address ID and activity are not hidden.
For example, let’s say you have a friend called Mike, and you want to see what activity Mike has been carrying out lately. As a starting point you know that the day before, he used the blockchain to pay for a video game from a particular company.
You can look on the ledger, find the day, and see which wallet addresses were used that day to pay that particular company. It’s likely to only be one address, therefore, you’ve easily found Mike).
However, if there is more than one address that has used the blockchain to pay that particular company on the same day, you can look at their other activity to find your friend.
For example, if there is a second transaction to a charity, and you know Mike supports this charity, then you have a second confirmation transaction or data point.
So, Mike can use his wallet pseudonymously, but if people know him well enough, his specific activity could be easily found.
Which, of course, is like someone looking through your bank account transactions and seeing what you’re buying or where you’re going. It definitely feels like a breach of privacy and makes the idea of a wallet having a fake name a little redundant.
Buying Bitcoin and Your Identity
People being able to publicly see your transactions when buying is already a breach of privacy. However, there is more privacy invasion to come. Namely, buying Bitcoin.
Buying Bitcoin isn’t anonymous, at all. And there’s no way around it either. When you sign up for an account on an exchange platform, you are obligated to provide the exchange with proof of who you are, this includes items such as:
Your driver’s license
Proof of home address
- Form of government-issued ID
Opening an account on an exchange is like setting up a bank account. The exchange has to follow the know-your-customer (KYC) agreement.
Added to this, you may even be asked for your proof of income, or asked rather invasive questions like where your fiat currency has come from, or how you plan on using any profit made from your crypto. These are all in place to prevent and deter money laundering and the exchanges are just following government protocols.
The combination of your information on the exchange and your transaction activity being on the public ledger means that your account, wallet, transactions, etc, are a lot easier to trace than people realize.
If you’re planning on using your account or wallet for any nefarious activity, it won’t be long before you’re stopped. Using Bitcoin as a currency is simply not a way to hide from authorities.
Can You Make It Anonymous Yourself?
With any technical problem, there is usually a solution. Those who want Bitcoin to be anonymous are constantly working on making that happen. So, is there a way you can cover your tracks and make Bitcoin anonymous yourself?
Well, yes. Technically, there are a few ways that you can get around these obstacles but the processes are too technical for most people to understand or they’re just too expensive for it to ever be worth it.
However, one of the least complicated methods is by mining the Bitcoin yourself rather than buying from an exchange. This way you don’t have to give anyone your ID or follow the KYC protocols. However, depending on your computing power and the cost of electricity, mining alone can often be far too costly.
Another alternative is by using cash to buy Bitcoin. Cash will always be king when it comes to keeping transactions anonymous and is the only way to ever buy anything 100% namelessly.
You can buy Bitcoin in cash using Bitcoin ATMs. It’s also a place you can sell your Bitcoin in exchange for cash like you would at an ordinary cash machine. However, people often only use these ATMs to sell their Bitcoin if it’s an emergency since the rates and fees are higher than any other method.
You will also have to buy Bitcoin at a higher price if you want to use cash… but the upside if this is that your transaction is completely anonymous and your identity is safe.
There are several altcoins available at the moment that are genuinely anonymous; Monero, Dash, and Zcash, all offer users anonymous transactions, payments, etc.
All these options use technology that encrypts transactions and wallets and makes the coins nearly impossible to trace.
However, this kind of anonymous dealings is the last thing any government wants, and it’s likely that these three won’t be able to stay anonymous forever. Eventually, new ways will have to be invented to try and make crypto anonymous not just pseudonymous for the long term.
But, until that day comes, always keep in mind that unfortunately, for now, Bitcoin is not anonymous.
Important Points to Remember
- Your wallet doesn’t use your real name but does use a generated pseudonym
- The blockchain is a public ledger and anyone can view all the activity
- You can pay for Bitcoin in cash at a Bitcoin ATM but this involves a lot of fees
- Using an exchange to buy Bitcoin requires you to provide your ID and home address as a minimum
- Bitcoin is not yet completely anonymous
Why Joining a Mining Pool Is the Answer for Miners
A mining pool is a group of people who collectively agree to pool their resources and share the profits.
For example, have you ever split the cost of a bunch of lottery tickets with work colleagues or friends with the agreement that if one of the tickets wins you all share the prize? While you might have to share the prize, there is more chance of you winning in the first place. After all, it’s far better to share $1 million, than it is to keep 100% of nothing.
Well, a mining pool works in the same way. The group of miners will collectively use their resources to create more mining power. The more mining power you have, the higher the chance is that you will generate a block on the blockchain and therefore, receive the reward.
One of the best parts of joining a mining pool is that you don’t have to match other investors. The reward is divided relative to how much power each member contributed. This means you don’t have to be stinking rich or own a ton of resources in the first place. You simply take out proportional to what you put in.
You should also bear in mind that the mining pool will have an owner who will, rightfully, charge each member a fee for joining. The amount will vary from owner to owner, but it’s unlikely to ever be an unaffordable amount since the owner also benefits from having as many members as possible.
Expand Your Bitcoin Horizons with Mining Syndicate
If you would like any more information about starting or expanding your Bitcoin horizon; reach out to us at Mining Syndicate. Our mission is simple: Strengthen the Bitcoin network by enabling small-scale miners to affordably purchase and reliably host miners.
As a small miner, Chris became frustrated by the lack of hosting options available for miners with under 100 units. As luck would have it, he found a 2.5MW mining facility for sale right down the road, and thus, Mining Syndicate was born. Facilities #2 and #3 are currently launching and #4 and #5 are in the works.
Why is Mining Syndicate so successful? Because we have a team of people who are just like you, eager to be a part of the future of mining. If you would like more information about how you can be a part of Mining Syndicate, how our facility works, or the products we sell, you can reach out to us here.
Join our mining pool and see how your future can change!