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Feb 01

Bitcoin Anonymity

By Raymond Prince


How anonymous are transactions on the block chain?

One of the main features of Bitcoin is said to be anonymity. The question is, when using Bitcoin, what does this exactly mean for you as a user? Are all your transactions anonymous? Many people will say that the public ledger, known as blockchain, cripples the notion that Bitcoin is anonymous. This argument reveals two concepts which share a thin line, namely, privacy and anonymity.

Anonymity vs Privacy

The definition of the term private can often be muddled in colloquial use. Private data is information not known by the public, and is restricted to an individual or small group of select persons. Anonymity, has a much narrower context, and is when one's identity is not public knowledge in a particular situation. One might say that the person's idenity is private in this context. What becomes apparent when comparing these two terms is that there is clearly some overlap. However, when put into the context of refering to a partiular data set, have two distinct meanings.

If you've ever given a donation to an organisation, you might have received a public letter from them naming all who've donated to the cause, thanking them for their contribution. In this context the transactional details are private, as no one knows how much you've given, except for a select group of people. The transaction is not anonymous though, since the public knows who've made a contribution.

The inverse of this example is what occurs on the Bitcoin network. Bitcoin makes use of a blockchain which holds all transactional data which occurs on the bitcoin network. The data cannot be said to be private, since the blockchain is public. Therefore, the flow of bitcoins can be seen clearly by all persons, and those bitcoin can be traced back to their origin. Is the transactional data anonymous however? In the strict sense of the word, yes it is. There is no user information in the blockchain, and there is no ledger of Bitcoin addresses owned by a particular person. Therefore evening if the origin of some Bitcoin was determined, that address would have no data attached to it, to indicate who owns it.

Does this mean that no one can ever figure out who owns a particular Bitcoin address. Unfortunately not, and just because the Bitcoin blockchain is void of all personal data, it does not mean that transactions will stay anonymous. There are several weak areas which are unrelated to the Bitcoin protocol. For example, entry into the Bitcoin market might be done by linking your personal bank account to an exchange, and using your fiat currency to purchase Bitcoins. Legislation requires that cryptocurrency exchanges require a user to provide personal infromation before allowing you trade fiat currency for Bitcoin. This entry point now links your personal information with a particular Bitcoin address. Even if you transfer those coins between a hundred different address, there is still the potential of someone discovering the identity of the original address.

There is large amount of guess work involved in this process, as well as a lot of work to do, but results can still be achieved with a large degree of certainty, if the right links are found. Bitcoin is naturally less anonymous than using cash, or physically trading goods, but regardless of this, is still significantly more anonymous than traditional banking methods which link all transactoins to a person's identity profile.