Bitcoin is pseudonymous
Bitcoin is a pseudonymous cash system. The ledger’s transparency is a blessing and a curse.
With the unfortunate rise of centralised exchanges asking for more information than necessary, your fingerprint on the blockchain is clear. Centralised exchanges and chainalysis companies work closely with regulators to stay in business. Therefore, learning to preserve your privacy when transacting with Bitcoin is vital. Here are some standards to apply.
Learn about UTXOs Management
Privacy-focused wallets such as Sparrow Wallet or Samourai Wallet enable you to control your transactions better. You can label every input and output, known as coin control or UTXO management.
Bitcoin and its community are fortunate to have outstanding cypherpunks such as Samourai Wallet. They have put together an insightful and short series on UTXOs management. This is a non-negotiable to understand better how transactions work in Bitcoin and how we leave fingerprints on the blockchain without realising it.
Bitcoin Privacy Series by Samourai Wallet
Learn about forward-looking anonymity sets
I mentioned that centralised exchanges or companies such as Wasabi work with Chainalysis companies, but how do they determine who is behind a transaction?
When you open an account with any centralised exchanges, you are obliged to provide one of the following:
- Drivers license
- Proof of home address
- Face scan
- Phone number
After buying some Bitcoin, these companies can firmly say this UTXO belongs to you. If you send these SATS to a cold wallet, such as Passport from Foundation Devices, the company can probabilistically assume that this address belongs to you. This information can be sold to the government, and without realising it, people around the globe know:
- Your spending habits
- Who are you transacting with
- Where you are transacting
- How much Bitcoin do you own
- How much you haven’t paid in taxes
Thankfully there are two standards we can apply to improve our privacy.
Firstly, learn how to use Whirlpool CoinJoin. “A Whirlpool CoinJoin is just like any other Bitcoin transaction, comprised of inputs and outputs. However, each input is provided by a different Bitcoin wallet, and each output is returned to one of the participating wallets. This transaction is organised by Samourai Wallet’s central Whirlpool coordinator, all the time without the coordinator knowing which input belongs to which output (“blinded”), and without you ever giving up custody of your bitcoin.”
Learn more about Forward-Looking Anonymity: Track Me If You Can — How Bitcoin Forward-Looking Anonymity Sets Work
Before mixing, we want to ensure that we source our Bitcoin from a decentralised and peer-to-peer exchange to avoid providing sensitive information.
Secondly, buy your Bitcoin only from decentralised and peer-to-peer exchanges. These exchanges do not ask for any information, not even an email for the best. Here are some recommendations:
You might pay 2-5% extra on your Bitcoin but privacy has a cost but immense value. Do not undervalue it.
Surround yourself with privacy and Bitcoin-focused communities
When you use open-source projects, the companies or communities behind likely have public groups.
I have found that asking basic (sometimes foolish) questions there results in conversations, a better understanding of complex topics and a sense of community that’s lost today.
These open-source communities are users, just like you, and they most likely asked the same questions that you have. These groups are libraries and sources of knowledge open to everyone willing to learn.
Here are some telegram groups you can join: