How to protect privacy when making a transaction with Bitcoin, seeing that the blockchain is public and pseudo-anonymous?
Contrary to what bitcoin critics argue when they think that BTC is suitable for money laundering – for example what the US Treasury Secretary said recently – the blockchain is public and those who use cryptocurrencies for illegitimate operations are likely to be arrested and imprisoned quickly.
However, for those who want to protect their privacy while making legitimate transactions, there are some measures to consider in order to keep transactions away from prying eyes.
Since the blockchain, in particular that of Bitcoin, allows tracking the bitcoins that are linked to an address, it is easy to conclude that if a person has someone’s address it is possible to check and see all the transactions made and understand where those bitcoins originated, how they were used and when.
The danger of losing privacy is thus quite high when sharing addresses with others, and if it is shared with criminals or hackers, there might be attempts to extort money.
So how can privacy be protected? Here are some guidelines when making transactions with bitcoin – but also with other cryptocurrencies.
Use a different address every time
One system to adopt when operating with bitcoin is to always use a different address for receiving payments, so as to avoid revealing the number of cryptocurrencies in possession.
Needless to say, having so many addresses involves difficulties in managing them, which is why a solution has been devised: BIP39 (Bitcoin Improvement Proposal), which uses an HD (hierarchical deterministic) wallet to get a private master key, generated by a series of words called “seed”, from which a series of underlying keys can be generated. In practice, a seed allows having many addresses.
Hiding the IP address
Another aspect to take into account is to keep in mind that when sending a transaction in the network, the Internet is used and to do so the terminal needs an IP address to connect to the network, which obviously links the users to a specific session and location, which means it is easy to trace the device or in any case to narrow the search field to a specific geographical region.
The solution consists in having a system that conceals or at least changes the IP address when connecting to the network, for example, some tools available are the Tor browser or a logless VPN service, possibly paid and not free of charge.
Transaction mixing services
Finally, there is the option of using bitcoin transaction mixing services. Their operation is quite simple: basically, all the transactions are gathered in one and then several outgoing transactions are generated, so it is not possible to link the starting address with the destination one, precisely because the amounts are mixed.
This solution, however, has significant disadvantages because there must be a sufficient number of transactions to start the service; moreover, the use of these services often involves high fees, making it impractical to use on small amounts.
You can also use CashShuffle in Bitcoin Cash (and soon even better - CashFusion)