TL;DR
Bitcoin isn’t truly anonymous, it’s pseudonymous. This guide explains how to improve your privacy when using Bitcoin by breaking the link between your identity and your transactions. We’ll cover coin mixing, using tumblers (with warnings!), new addresses for each transaction, and more.
1. Understanding Pseudonymity
Every Bitcoin transaction is recorded on a public ledger called the blockchain. Instead of names, it uses ‘addresses’ – long strings of numbers and letters. However, these addresses can be linked to you through various means: your IP address when buying Bitcoin, exchanges requiring ID verification, or reusing the same address multiple times.
2. New Addresses for Each Transaction
- Generate a new address every time you receive Bitcoin. This is the simplest and most important step. Most wallets make this easy.
- In Electrum: Go to ‘Receive’ and click ‘New Address’.
- In Ledger Live: The wallet automatically generates a new address when you request one.
- Avoid reusing addresses. Reusing an address makes it easier to link transactions together and trace your activity.
3. Using Coin Control Features
Many wallets (like Electrum) offer ‘Coin Control’. This lets you choose which Bitcoin UTXOs (Unspent Transaction Outputs – basically, the individual pieces of Bitcoin in your wallet) to use for each transaction.
- Separate coins. Use Coin Control to split your Bitcoin into smaller amounts and keep them separate.
- Avoid mixing old and new coins. When spending, try not to combine UTXOs from different sources (e.g., a purchase vs. wages).
4. Coin Mixing Services
Coin mixing (also called Bitcoin tumbling) attempts to break the link between your input and output addresses by combining your coins with those of other users.
- How it works: You send your Bitcoin to a mixer, which then sends you back an equivalent amount from different sources.
- Risks: Mixers are often associated with illicit activity and can be targets for law enforcement. Some mixers are scams!
- If using a mixer (proceed with extreme caution): Research thoroughly, choose reputable services (if any exist), and understand the fees involved.
Warning: Using coin mixing doesn’t guarantee anonymity and can attract unwanted attention.
5. Bitcoin Tumblers
Tumblers are a type of coin mixer, often web-based. They generally work by sending your bitcoin to multiple addresses controlled by the tumbler service, then returning an equivalent amount from different addresses. They carry similar risks to other mixers.
- Avoid centralized tumblers: These are easier to track and shut down.
- Research thoroughly: Check reviews (though these can be fake) and understand the tumbler’s security practices.
Warning: Tumblers are high-risk and often attract scams or legal scrutiny.
6. Using a VPN/Tor
Hiding your IP address can prevent exchanges from linking transactions to your location.
- VPN (Virtual Private Network): Routes your internet traffic through an encrypted server, masking your IP address. Choose a reputable provider with a no-logs policy.
- Tor: A network of relays that anonymizes your connection by bouncing it through multiple nodes. It’s slower than a VPN but provides stronger anonymity.
sudo apt install tor
7. Privacy Coins
Consider using privacy-focused cryptocurrencies like Monero (XMR) or Zcash, which are designed to be more anonymous by default.
8. Hardware Wallets
Using a hardware wallet adds an extra layer of security and control over your private keys, reducing the risk of them being compromised.