The Bitcoin Privacy Problem: How to Increase Bitcoin Privacy

When Bitcoin first became popular in 2012, people everywhere stated that it was a more private and decentralized form of money. While Bitcoin is truly decentralized, time has come to show us that it is not truly private, in fact, many die-hard Bitcoin believers are now discussing how the coin is anything but.

Read on to learn more about Bitcoin privacy and how many in the space wish to change it in the future.

Is Bitcoin Private?

While many people believe so, the answer to this question is unfortunately no. Bitcoin was built with privacy in mind, obscuring names with what is known as a key, or a string of encrypted numbers and letters. This key is recorded on the ledger with each transaction, keeping an individual’s name off the ledger. But just because your name and identifying information aren’t on the ledger, doesn’t mean Bitcoin gives any form of privacy.

Unfortunately, unlike Tornado Cash, most Bitcoin addresses are easily traceable, especially by the government. If any wallet account is attached to a website like Coinbase or Kraken, it is very easy for authorities to pull the KYC information off those websites and match accounts with names and addresses.

Even if you stay off the regulated exchange marketplaces, there are many ways for the authorities to trace a Bitcoin address. One of the most famous ways is if you use Bitcoin to order something off the internet and have it delivered to your home, well, now the authorities have your name and address, as well as what you have ordered.

This is how the authorities have brought down many drug dealers as well as those ordering illicit drugs from the internet, namely a website that used to be known as the Silk Road.

Even if you don’t order anything for home delivery, authorities claim they can trace your account number even with an IP address. The US government has even flagged certain Bitcoin addresses which will notify their techs when money is moved. While it is unlikely your Bitcoin key is one of these addresses, if you use your address for illegal or grey market activity, it may end up on this list, meaning every transaction you make will be monitored.

While the open ledger is an important part of how Bitcoin functions without centralization, many are wondering what can be done to make Bitcoin more private.

Related: Tornado Cash is Sanctioned by the US Government

Methods to Make a Bitcoin Transaction (More) Private

In the past, someone using Bitcoin could use a site like TornadoCash to make their transaction private. Unfortunately, this site was shut down in 2022 by the US government. Regardless, new methods have already popped up which can be used to keep a transaction private.

1.     Mixing Tools

Tornado Cash was a platform that is known in the cryptocurrency world as a mixing tool. It would take a handful of transactions and mix them together to obscure the true wallet addresses.

This offered some privacy to users, which infuriated the US government. Although Tornado Cash has been shut down, there are other mixing protocols popping up on the web which use the same concept to obscure wallet addresses.

2.     Encrypted Communications

Another method of increasing privacy in the Bitcoin network is using an encrypted communication method to obscure IP addresses and other identifying information remain private when making a transaction.

The Tor Network is the most famous of these, but there are many others in the space. Some of these have even developed wallet apps that allow users to hide the information connected to a wallet as well as the wallet number when performing transactions on a blockchain like Bitcoin.

3.     Layer 2 Solutions

While Bitcoin’s open ledger can’t ultimately be obscured, many are using layer 2 solutions to make their transactions more private. The most famous of these is the Lightning Network, which similar to Tornado Cash, groups transactions into one.

This grouping, unlike Tornado Cash, is a little bit traceable, but, in the grand scheme of things, it makes it more difficult for the government to separate and evaluate transactions, meaning it makes it more private than a regular transaction on the blockchain.

Basically, the government will be able to see what was purchased and by which group of addresses, but they can’t break these down to one individual. They can, however, trace patterns over time, so this method isn’t foolproof.

4.     Don’t Use Official Exchanges

This is a tough one, because official exchanges are safer for the average investor, especially if you are new to the cryptocurrency space. They offer you some protection that unregistered exchanges don’t offer.

That being said, any official exchange will require KYC information, which will not grant you any privacy. So, this one is a bit of a double-edged sword, but if you want privacy while using Bitcoin, you’ll need to stay off the registered exchanges.

Related: Hot Wallets vs Cold Wallets: How Your Money Is Stored

5.     Use a Privacy Coin

Our fifth and final method of increasing Bitcoin privacy is, unfortunately, not something that can be applied to Bitcoin. But, if you truly need to make some private transactions, it may be time to switch over to using a privacy coin like Monero, which obscures all transactions from outside eyes.

Although this doesn’t solve the Bitcoin privacy problem, it is an option for those who need it. Remember, to use Monero privately, don’t use a Monero wallet associated with a registered exchange.  

Bitcoin Privacy in the Future

The problem of Bitcoin not actually being private is nothing new. Sadly, we live in a world where the government will do anything to ensure there is no financial freedom. Bitcoin doesn’t currently have any methods of increasing privacy available beyond what we’ve mentioned, but in the future, there may be a soft fork that changes the protocol to increase privacy—but don’t hold your breath.

In the meantime, if you truly want privacy while making some cryptocurrency transactions, it might be time to employ one of the methods mentioned in this article. Whether you decide to use a mixer, or maybe a privacy coin, any method you take will help to contribute to the privacy of your finances and decisions.

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