Are Bitcoin Transactions Anonymous?

Are Bitcoin Transactions Really Anonymous?

Bitcoin is articulated as an anonymous currency since it’s possible to send and receive bitcoins without providing any personally identifying information. Though achieving reasonable anonymity with Bitcoin can turn out to be quite complicated as well as perfect anonymity might be impossible.

Bitcoin is not anonymous. Rather, it’s pseudo-anonymous. Till now, most Bitcoin experts know this. However, it’s not much obvious to many that why Bitcoin is not really anonymous by default? And, what can be done to deanonymize Bitcoin users?

Bitcoin is pseudonymous. In present, sending or receiving bitcoins has become something like writing under a pseudonym. In case an author’s pseudonym is ever connected to their identity, then everything they had ever written under that pseudonym will be linked to them directly. When it comes to Bitcoin, your pseudonym is the address to which you receive Bitcoin from. All transactions involving that address are stored forever in the blockchain. When your address is linked to your identity, then every single transaction will automatically be linked to you.

In the original whitepaper by Satoshi Nakamoto, it was mentioned that Bitcoin users use a new address for each transaction they perform for avoiding the transactions being linked to a common owner. This would be the same as writing many books under different pseudonyms. Though this stays as a best practice, yet it’s not adequate to ensure the full anonymity owing to multi-input transactions.

Anonymity Defeated

To understand Bitcoin’s anonymity better, it’s important to first comprehend how Bitcoin mining works on a fundamental levels. There mainly three ways to de-anonymize Bitcoin users.

In the first place, even though Bitcoin transactions are transmitted randomly over the Peer-to-Peer electronic network, this system isn’t airtight at all. For example, if an attacker has the means to connect multiple nodes to the Bitcoin network, then combined data accumulated from these different nodes may be sufficient to determine where a transaction originated from.

In the second place, Bitcoin addresses can be connected to real identities only if these real identities are used in order with the Bitcoin addresses in some way or the other. This incorporates addresses which are used to deposit or withdraw the money to/from a regulated exchange or wallet service, openly exposed donation addresses, or the addresses which are simply used to send bitcoin using popular bitcoin trading platforms to someone or to the online store at the time of using a real identity.

Thirdly, probably most importantly, all the transactions over Bitcoin network are completely transparent as well as traceable by anyone. It’s generally this complete transparency which allows multiple Bitcoin addresses to be clustered together, and linked to the same user. That is why, if just one of these clustered addresses is connected to a real-world identity via one or many of the other de-anonymizing approaches, then obviously all clustered addresses can be.