How To Protect Your Financial Privacy with Bitcoin: A Comprehensive Guide
Bitcoin is a financial system that functions differently from the banking system we are all used to. Unlike established banking systems, you can store funds without the need for a third party to offer the service to you. This puts you completely in charge of keeping your funds safe and accessible to you alone.
Table of Content
1 . The Use of Fake Identity Can Protect Your Real Identity in Bitcoin
2. How Does Bitcoin Promote Anonymity?
3. Having Privacy Through The Use Of Pseudonymous Accounts
4. Bitcoin Transparency Has Need for Protection
5. How Your Real Identity Can Be Gotten Using Bitcoin?
7. Protecting Yourself from Being De-Anonymized
8. How to Obfuscate Transfers Made Between Identities
The stress and long process that is required to open an account with a financial institution are completely absent when creating a bitcoin account. You can do it yourself and at home from your computer without the need for assistance from any agent to guide you. This ease and convenience make it possible for you to have multiple bitcoin accounts easily.
As you can see, a bitcoin account and an account from a regular financial institution are different in many ways and two of these are of particular interest to us in this article: privacy and identity.
The Use of Fake Identity Can Protect Your Real Identity in Bitcoin
Your bank account and other accounts with financial institutions like PayPal, Payoneer, and also your credit card insist on a real identity which they verify to be sure. This makes it difficult for people to stay anonymous and unfavorable for some persons. Unlike all these, bitcoin allows you to make use of a pseudonym and take up any identity you may wish to work with.
Many people who wish to stay anonymous seek ways to use the internet anonymously and a perfect strategy is with the use of a VPN. A VPN hides your real identity and allows you to be yourself without fear of being known. A lot of people face rejection and other problems in society because of situations that are beyond them. This includes those who fight for their rights, those in very religious societies who are atheists, and those who criticize government policies and express their thoughts. These various categories of people and more have their safety being threatened and cannot be themselves even on the internet. With the advancement in technology, they can have as many followers as possible from across all places who share in their thoughts and beliefs but doing this with their real identity is like walking out in a battlefield with no protection on.
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Services that can be used to keep you anonymous while you still maintain your thoughts and air out your beliefs include blogs, photos, and also logo designs amongst others. These services may keep you anonymous but if the funding isn’t anonymous also you can be traced. And so to maintain your financial privacy, you need a different payment method from the traditional banking system and that privacy is what bitcoin offers you. With this, you can sponsor campaigns and express yourself freely anonymously and fund the services anonymously too.
How Does Bitcoin Promote Anonymity?
When it comes to empowering the public to be themselves and be more outspoken, bitcoin is that technology that makes it happen. Your use of the internet can remain anonymous with the use of a bitcoin account for funding whatever services you wish to pay for. This is because bitcoin allows you to open an account with the use of a pseudo-identity so you can stay unknown. It also allows fundraising done by groups to remain anonymous. Apart from the above-mentioned reasons for the need for a private and secure monetary system like bitcoin, there are other good reasons why a person would need to have financial privacy.
An example of such instance is a worker’s right group in a company or an office in need of volunteers to print flyers and to pay for servers and remote helpers. Contributions for all these could be made without having anyone responsible for any money realized as identities are not exposed.
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A similar use of a private financial system could be a victim of abuse who is trying to save to be able to afford an independent life, free from abuse. These savings will not be monitored as it is not tied to any real identity.
Below is a privacy model done the traditional way as is explained in the original bitcoin whitepaper by Satoshi Nakamoto.
Having Privacy Through The Use Of Pseudonymous Accounts
In traditional banking institutions like banks, the privacy of an individual is guaranteed by the institution itself and they try to make sure that your financial records remain secret and accessible to only you. This puts them in a tight position as they alone can see what is happening in your financial records and are responsible for your security.
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In the bitcoin world, however, account histories are not private but can be seen by everyone. This puts no one person in charge or responsible for anybody’s financial records. The good side to this, however, is the fact that the owner of the accounts is not known. Every address and transaction is recorded in bitcoin’s database which is publicly distributed. You may wonder how then those who run the accounts can be safe. The addresses do not have any addresses or names attached to them and this keeps everyone highly anonymous.
Bitcoin Transparency Has Need for Protection
Bitcoin is highly transparent as you have seen because every piece of information is available and accessible to the public. Because of this, it is important that every bitcoin account owner should get a level of protection. Those who have a good amount of money in bitcoin would not want it to have that information available to the person they do transactions with for obvious reasons but there is only a limit to how much control you have over this situation. This is because each time you send money from your bitcoin wallet, the other party sees how much you have. This scenario can be likened to flaunting a huge wad of cash in a dark alley at night. So to prevent someone with criminal intent from knowing just how much you have, you will need to have several wallets and distribute your wealth amongst them all with different addresses for each transaction.
How Your Real Identity Can Be Gotten Using Bitcoin?
Even though bitcoin accounts are made to sound completely anonymous, this anonymity is not 100% as there are ways a transaction can be linked to your real identity. It is difficult to remain anonymous against someone who is seeking you out and knows exactly what to do. The best way to have a good chance of achieving privacy is through the use of holistic encryption and communication tools (PGP, Tor, and OTR).
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You could come in contact with numerous bitcoin addresses in a few months and all that is necessary to figure out your real identity is to link one of those addresses to your real identity.
1. Bitcoins Are Not Untraceable On Blockchain
When you perform a bitcoin transaction, there is always an input (the source of the bitcoins) and at least one output (the destination of the bitcoins). What this means is that with just an address, a trail can be formed and the bitcoin traced.
Another feature of bitcoin transactions is the need to match previous transactions. For example, if 1 bitcoin is received but has the need to spend only 0.4 bitcoin, you will need to create a transaction whereby 1 bitcoin leaves your account but only 0.4 is for payment and the remaining 0.6 comes back as change. The whole process of refunds and actual payments happens automatically but to benefit from continuous anonymity, you need to have a good understanding of this feature.
The sender of the 1 bitcoin will see the transactions you do and the amounts involved, but will have no idea of what you did with it. The transactions that will be seen are those for the 0.4 bitcoin and for the 0.6 bitcoin. The sender will not know which was spent and which was returned as change so it will only be a 50% guess. Any further transactions will reduce the percentage of the guess.
1 input consumed, 2 outputs created
This is the reason why a lot of transactions even among your own wallets will increase your anonymity provided your wallet doesn’t repeat an address.
Another instance is if you want to use 1 bitcoin for a purchase or payment but received 0.5 bitcoin. You will need to have more bitcoin addresses that can be combined to give at least 0.5 bitcoin. This also is a 50% guess but in this case, you have an additional publicly visible bitcoin address. The more addresses you have that are visible, the easier it would be to find your real identity.
2 inputs consumed, 2 outputs created
2. Your Name May Be Linked To Your Bitcoin Address
During your transactions using bitcoin, your name may become linked to your address. An example of such a scenario is if you pay for goods online and have them delivered to your address. This will carry your identity in the invoice and will be linked to your payment source. Most websites insist on some form of identification before you can make a purchase even if it is with bitcoin.
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When you make a purchase of bitcoin from someone in person, they will keep a record of the transaction and may know who you are too. This record could fall into the wrong hands or could even go public at some point.
Some countries could require you to reveal your identity when doing any transaction using bitcoin as a way of preventing money laundering.
3. Your IP Address May Be Linked To Your Bitcoin Address
A bitcoin transaction basically involves you creating a message on your device and sending that message to the bitcoin network. Someone with a large number of nodes in the bitcoin network may easily link some of your transactions to your IP address and once this happens, your anonymity is gone.
If you perform bitcoin transactions over the computer, it is easier to avoid this instance from happening. You can do this by performing all transactions through the Tor network. It won’t be an issue as most bitcoin wallets and clients support Tor’s Socks5 proxy.
4. You Could Be Tracked If You Reveal Your Bitcoin Address before It Goes Into the Blockchain
When a bitcoin address is entered into the blockchain, it becomes part of a global database that is visible to the public. So at this point, anybody can have access to it but not know who owns it. Before your address gets into the blockchain, it is assumed that only those involved in a transaction have the address and if it is found by another party, you can be tracked.
To stay safe while carrying out transactions even if your address isn’t yet on the blockchain, it is necessary that you do all transactions via encrypted channels. Some of such practices include:
- Ensure that the website you visit has HTTPS enabled even when you search for bitcoin addresses
- Use PGP and OTR to encrypt all communications
- Stay anonymous with the use of a VPN and Tor
5. Being in Possession of a Wallet File Could Be Enough to Show That You Have Bitcoins
A signed message shows that you have a bitcoin account but doesn’t reveal the private key. So you have to be cautious when signing messages using your bitcoin keys.
A person trying to take away your privacy and get information on your bitcoin account may not need a signed message as proof that you have bitcoins. Just knowing that you keep records of public addresses you transact with is enough to tell that you are involved with bitcoin and blockchain can show them the exact transactions. All they have to do is search for the addresses you have recorded.
Most bitcoin wallets do not encrypt public addresses but only encrypt private keys. This is as to improve user experience eliminating the need to enter a password each time you want to check transactions or your balance.
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Storing your bitcoin wallet away from the reach of others is a good way to keep your privacy maintained. You could store it in a USB drive, or an email account if the keys have good encryption, or in a cloud storage service. Note that anybody who has access to this storage and finds your wallet could make a good guess of the addresses you control and your transactions.
To ensure that you are fully protected, encrypt all your backups with a second password or PGP.
How to Be Transparent?
Once bitcoin is mentioned, privacy comes to mind. This privacy not only involves the amount of control you have over what people see. This privacy also gives you control over your personal information and allows you to hide it or reveal it. Sometimes it is necessary to reveal certain information even when bitcoin is used and this is usually for purposes of gaining trust as a legitimate person or group in the eyes of your audience.
Bitcoin not only gives you transparency but also allows you to reveal as much as you want. With transparency, you can prove transactions and defend ownership of a bitcoin address. Being transparent to a degree also allows you to be able to audit your organization to the very last satoshi (satoshi is the smallest bitcoin unit) but without revealing your vital information like name and address.
As compared to other financial institutions, bitcoin’s transparency is solid and can be used to prove the occurrence of financial transactions. The blockchain is not a man but a program and so it can neither be bribed nor can it lie. It only shows what is.
1 . Transparency through Signatures
Bitcoin transparency has different forms and the simplest of them is to link two identities with signed statements. The principle is the same but the method varies and is dependent on your wallet software. Basically, you write a verbal statement and then use your private key to sign it digitally. Signing in doesn’t prove that the statement is true. What it proves is that the owner of the address made the statement.
A sample scenario can be seen where a website’s operator claims in their statement that they control a bitcoin address, and the owner of the bitcoin address also claims that they are the operators of the website in their own statement. With this, you can be sure that the two are the same person and you can then safely send funds to the bitcoin address with the assurance that it is going to the correct website.
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You can also make statements about your transactions with the use of these signatures. Say you need to show auditors proof that you control a certain amount, or that you made a transaction.
Signatures are very useful in digital receipts that cannot be forged. You can prove to an art dealer with a few clicks that you are able to pay for a painting, or show investors that you still have their money safe.
By signing and verifying the message you prove that you are in control of the funds.
2. Transparency through Reuse of Addresses
An example of transparency through the reuse of one address is seen in the Edward Snowden Defense Fund. It uses one bitcoin address for all donations and this shows the amount that has been raised and gives the backers assurance that their money is being used for the right purpose and goes to the right account.
This kind of transparency can be used in any situation to prove that funds are not being stolen but used responsibly and for the right purposes.
Protecting Yourself from Being De-Anonymized
1 . Be Careful When Revealing Information about Yourself
The first step in protecting your identity is to be careful of what you do and what you reveal about yourself. Questions like what VPN do you use? What bitcoin wallet do you use? What have you used your current IP address for in the past? Who have you reached out to recently and what was discussed? Was the communication encrypted? What tabs do you frequently open when you browse? What is the source of the money in your bitcoin wallet and what transaction have you made with it? All the above information is very important in maintaining your anonymity.
All the above questions and their answers are bits of information that reveal a bit about you. So always stay smart and be security conscious when online especially when filling out forms.
2. Never Use an Address More Than Once
When you choose bitcoin wallets, go for the ones that take your privacy seriously by never repeating addresses. HD wallets (Hierarchical Deterministic wallets) in theory can generate an infinite number of addresses from only a single seed. With HD wallets, you can use a new address each time you perform a new transaction and also easily have a safe backup mechanism.
Services who have fixed withdrawal addresses should be used with caution and to better your chances of anonymity, manually change your address after each withdrawal to a new and unused address. Try to encourage others especially those you transact with to also change their addresses regularly after each transaction. It concerns you because if they practice wrongly, your privacy will be affected once you transact with them.
3. Make Use of Tor
To maintain your anonymity online, you can make use of the Tor browser or the TAILS OS which is preinstalled with the Electrum Bitcoin Wallet. Make sure that everything you do goes through Tor automatically. You can do this by configuring your bitcoin wallets to connect to the bitcoin network through Tor. The configuration is pretty easy and you just have to install the Tor browser and configure proxy under the ‘Preferences’ option. Preferences > Advanced > Network > Settings. Change the default Socks v5 setting to 127.0.0.1 on port 9050. And then round it up by entering the same figures into the connection settings of your bitcoin wallet.
Apart from routing your transactions through Tor, it is also good practice to route your chats through Tor using the same settings for proxy. Many cloud storage providers can be configured using this method also.
4. Make Sure Your Browsing, Emails, Chats, and Backups Are Encrypted
Secure Your Browsing
When viewing websites that have any information on you; your identity or bitcoin transactions, always make use of HTTPS protocol. The protocol is able to encrypt the data traffic between your computer and the site you are visiting. If you see a green lock icon in your browser’s address bar, it is an indication that the website you are viewing has HTTPS.
Another method or practice to ensure that your browsing is safe is with the use of a VPN. VPNs work by hiding your real IP address from the sites you are on making your real identity hidden. VPN service providers are charged with providing you with alternative IPs and from different locations so you need to be careful when choosing a VPN service provider. LimeVPN is a great choice of VPN service as they have a pool of IPs and fast internet speed waiting to give you the anonymity that you desire.
Lastly, the Tor browser is another approach and it can effectively hide your location from the sites that you visit. Services that make use of an onion address allow for the best end-to-end encrypted and anonymous connections online.
Encrypt You Chats
For maximum chat protection, create and make use of at least one jabber account for each of your pseudonyms online. It won’t be a problem as there are a lot of free services for you to choose from. Sign up and route all your chats through the Tor network with the inbuilt Socks v5 proxy to get extra security.
To be sure that your chat can only be gotten and read by the person it was meant for, use OTR encryption protocol. It is very reliable but you must note that you can only make use of it if the other party is making use of it too.
Make Your Emails More Private
The most vulnerable of all online services to hacking and snooping is email service. A good email service provider will try to keep you secure by making it difficult for hackers to have access to your system but they are still under the government and will hand over your data if it is requested. If you are seeking complete privacy even in your email, the use of Tor would be a great option but email service providers make this impossible to achieve. They do this by insisting that all email addresses be affiliated with a mobile number or a real and verifiable identity.
Your option is to encrypt your emails using PGP and this is only possible of the other party uses PGP too. If you really require privacy, then you may as well avoid all forms of communication via email.
Secure Your Back-Ups and Encrypt Them
There is no one way to back up your bitcoins as the method you use depends on the wallet software you use. If you use HD wallets, you will get a string of random words that you can use to recreate your wallet. All you have to do is write those words and store them safely away from the reach of others. You have to be really careful because criminals only need to know your words to have access to your bitcoins and steal them. Storing the words on an electronic device makes it susceptible to criminal attacks as the device can be hacked so you need a safe physical space instead.
It is easier to encrypt the random string of words from your HD wallet using PGP but using this method will need you to have a way of backing up your PGP key. If you, however, encrypt your PGP key using a long and memorable password, all you now need is a master password to have access to all your files. You can learn how to create a good master password here. Now you can conveniently back up your files and encrypt then with an encrypted PGP key.
5. Use Different Wallets for Each Online Identity
It is not difficult to have and maintain a different bitcoin wallet for each of your online identities. With each identity, you could have a wallet for a specific need. It could be a wallet meant for incoming donations, a wallet for revenues from ads, a wallet for your real identity, or a wallet for your savings.
A wallet for each identity doesn’t mean you need to download separate software for each identity. You could simply separate your wallet files and not confuse one with another. When there is a need to move funds from one identity to another, you just obfuscate the trail so that it is not easy to link both identities together.
6. Obfuscate Transfers You Make Between Identities
Bitcoin is very transparent and usually needs a degree of obfuscation to protect the business and trade. The way it should be is that a transfer from a person to a bank account should not be revealed to an unconcerned part, nor should the customer or those in competition in the same business have an idea of how the money is realized. If obfuscation is not done, information that is vital and unnecessary to be known by another party will be revealed. So obfuscating transfers helps to keep your bitcoin wallet private.
How to Obfuscate Transfers Made Between Identities
1 . Individual Exchange
An example used to demonstrate this method of obfuscating transfers is a bitcoin exchange with another person at a 1:1 exchange rate. This obviously requires a level of trust in the other party. Another method under individual exchange is the use of an external escrow service. The use of an external escrow is barely used because the escrow company could have records of the transaction that is compromising.
2. Online Wallets
You can also protect the privacy of your account with the use of an online wallet that doesn’t give unique bitcoin addresses to each user. Online exchanges are a good example of this. If you make deposits into such wallets, your bitcoins might end up going to someone else. You too may end up receiving someone else’s bitcoins. These services are called Tumblers and they try to keep you anonymous and your bitcoins without any links to you. It is worthy to note at this point that you won’t have an increase in the loss of bitcoin during the whole process.
Common bitcoin transactions are usually in accordance with anti-money laundering regulation. So your transaction records will be kept and stored for as long as is possible. These records get handed over to a government agency that is in need of it. You might also be asked to show proof of identity before you are allowed to make any withdrawals. This practice may affect your privacy way more than just tracing your bitcoins.
No tumbler wallet service will give you the assurance that you won’t receive your originally owned bitcoin. Giving such a guarantee would mean the whole system is tracked and since you would most likely use a tumbler wallet to stay anonymous, it defeats the whole system and idea. A risk that is worth noting when you exchange bitcoin is that you are trusting your bitcoin with a third party that is also highly anonymous. You will have no leads or someone to hold responsible if it happens that the exchange or wallet provider vanishes with your money.
3. Altcoins
An easy and common way to disconnect yourself from your bitcoin is just to sell them. There are various trade options for bitcoin and you could exchange yours for money or gold or better still, you could exchange them for altcoins. Exchange for altcoins is safer and easier to execute while still ensuring that you remain anonymous online. You could also sell your bitcoin and have it exchanged for another cryptocurrency with a high volume and market cap and then buy it again shortly after.
To do this successfully without compromising your anonymity, you will need to find multiple bitcoin exchanges that have low know your customer requirements and are trustworthy with your coins. This in itself is not easy to do.
4. Coinjoin
Coinjoin is by far the most promising method to maintain very private finance when dealing with bitcoin. This is because coinjoin works by combining many transactions and having them as one so that is it not easy to distinguish which inputs and outputs are correlated.
You can do this with software and this deals with the risk of stolen funds or disappearing funds. Each of the software signatures is created on the participant’s computers, so it will be difficult to alter the transaction or redirect funds even if someone else tries to connect the signatures. The funds, however, will always be in a bitcoin address that you are in control of.
You can do this in a decentralized way so that eternal parties or centralized servers are not relied on. All that is needed are the participants of the transaction.
Coinjoin effectively scrambles all the inputs and outputs so that everyone continues to remain anonymous.
As promising as coinjoin is, its biggest problem is the possibility to correlate the inputs and outputs that exist. This is because the number of mathematically possible combinations of inputs and outputs are few and so a computer is able to match inputs with the corresponding outputs.
To reduce the possibility of someone finding out which inputs and outputs are of the same pair, the protocol has to be made standard the same way. As it is not easy to make the inputs standardized, you can predefine the outputs. For example, you may decide to limit the output to 1 bitcoin. Doing this will make it impossible to match the account to the transaction as every available output will be for 1 bitcoin. Your inputs, however, will more likely be more than one bitcoin each and the difference will be returned to you untumbled. The reason is that the spare amount can be matched to a transaction.
You can apply coinjoin more than once and it will save transaction fees as many transactions are grouped together. If you want to have private finance dealing with bitcoin, coinjoin is highly preferred.
Conclusion
Contrary to popular belief, bitcoin is indeed traceable and this development defeats the whole purpose of dealing with bitcoin. Its ease of operation from account opening to the monitoring of funds makes it preferred to other financial institutions and services, and the anonymity it was supposed to offer made it even more appealing to a lot of people. The good news is there are some good practices on the way bitcoin transactions can be done that will retain your anonymity and financial privacy with bitcoin and of such is the use of a VPN.
LimeVPN is a great choice to help keep you anonymous online and have your bitcoin transactions untraceable. This is possible as you will be given a different IP address by the VPN service provider which isn’t linked to your real identity. With this, your transactions and the sites you visit will not be linked to you like the channels of data transfer are encrypted. Stay ahead of those who seek to unravel your identity and steal your funds by remaining in the lead through your use of the best services for you.
