a personal opinion.
Whenever you use bitcoin to move funds around, you can essentially hide your identity behind a bitcoin wallet address (Chapter 5 talks more about wallets). These wallet addresses are a complex string of numbers and letters (both lower- and uppercase) and provide no insight into who you are or where you’re located. In that regard, bitcoin offers a certain level of protection you won’t find in most other payment methods.
But that is also as far as the anonymity goes, because bitcoin wallet addresses are part of a public ledger – the blockchain – which tracks any incoming and outgoing transfers to and from any address at any given time. For example, if we were to send you 0.01 BTC right now, anyone in the world could see the transfer from wallet address A to wallet address B. No one would know whom those addresses belong to, but the transaction itself would be in plain sight.
This story changes a bit whenever bitcoin exchanges are involved (Chapter 2 talks more about exchanges). Anyone can see a transfer from your bitcoin wallet to the wallet address of the exchange, as these are publicly listed in most cases. However, if you sell your bitcoin, it becomes a lot harder to track where those coins went to. In that regard, there is a small sense of anonymity, but once again, it depends on your personal opinion as to how secure this is.
Introducing third-party anonymity
Ways to stay anonymous when using bitcoin do exist, though none of these methods is very user-friendly at this time. Generally speaking, those who are interested in anonymity may have something to hide. It could be that they are seeking to avoid paying taxes or that they are purchasing illegal goods or services in their jurisdiction. Using services such as an online wallet, you can “mix up” coins and extract them from a completely different address, without the addresses being linked together in any way. This technology is developing even as we type. But using such services involves a few risks, and if your coins are lost in the process, there is no way to get them back. Don’t worry too much about losing your coins though – we explain more on how to manage them and your wallet in Chapter 5.
Protecting privacy
When it comes to protecting your privacy, the story is similar.
✔ You can generate a new address for every individual transaction.
✔ You can avoid posting your public bitcoin wallet address in a public place.
Generating a new wallet
When receiving funds from another user, you can opt to give them a brand new, freshly generated wallet address, which cannot be directly linked to any existing addresses you already own. This type of throwaway address lets users isolate transactions from one another, which is the primary precaution you can take to protect your privacy.
However, depending on how you store your funds – which type of bitcoin client you are using and which operating system you’re using it on – you may also be able to generate change addresses. For example, if you install the Bitcoin Core client on your computer or laptop, you can create a new change address every time you send funds to someone else.
Keeping your wallet address secret
Another way to protect your privacy – to a certain extent – is by not posting your public bitcoin wallet address in a public place. Using the address on your website, blog, social media, or on a forum is not a good idea if you want privacy. Once someone stumbles across your wallet address and can somehow tie it to you personally, there is no way to restore privacy other than by using one of the aforementioned methods.
Demonstrating fungibility
The main problem with bitcoin is its fungibility, or more correctly, lack thereof. Fungibility has nothing to do with mushrooms, by the way. It’s just a fancy term for goods being interchangeable or capable of being substituted … and that suits bitcoin.
Most governments in the world will stick to their own, controllable system of issuing fiat currency. Local currencies are centralized and issued by a central bank. If they need more money, the central bank can simply issue more money by turning on the printing presses or engaging in quantitative easing as it’s been termed. Thus, either by order of the government or by acting as an independent authority – a central bank may boost liquidity in the economy by carrying out quantitative easing. With bitcoin, this is not the case, as there is a fixed liquidity cap of 21 million coins. Thus, the cap of 21 million coins essentially means that bitcoin is not fungible as other fiat currencies are.
One of the biggest hurdles to overcome whenever a new technology comes knocking on your door is whether or not you should put your trust in it. In the case of bitcoin, that trust has to work on both sides. Even though you as the user are always in control of your own finances, you still have to trust the rest of the bitcoin network to not drop off the face of the earth tomorrow.
