Questions about how identity is tied to Bitcoin and its uses are understandable. It can be more than a little confusing to analyze which aspects of your name and personal information are associated with the platform. While it has a reputation for allowing users to operate in the shadows, you may also know that Bitcoin is tied to distributed ledger technology, which records every transaction and traces it back to its origin. So, is Bitcoin anonymous?
Is Bitcoin Anonymous?
The short answer is no, not quite. While anonymity indicates that an actor's identity is unknown, Bitcoin transactions are linked to a specific address and thus an 'identity'. However, this address does not necessarily have to be associated with a real identity. This is why Bitcoin is often described as a “pseudonym.” If a user's Bitcoin address is linked to their real identity, then activity can be traced back. If not, it is only possible to trace the activity back to their pseudonym Bitcoin.
Bitcoin's blockchain-based ledger stores every transaction on the platform forever. The original white paper that launched Bitcoin, “Bitcoin: A Peer-to-Peer Electronic Cash System”, encouraged users to change addresses for each transaction to avoid being linked together and traced to a single user. However, this does not guarantee complete anonymity, as analysis of the public blockchain can link different addresses together. If even one of the addresses is associated with a real identity, they can all be equally good.
However, there are some methods to increase anonymity, or at least make it more difficult to trace an identity back to the user.
Using a mixing service, which exchanges certain bitcoins for others with different transaction histories, can eliminate the ability to tailor inputs and outputs to a single user. But it is vital that the mixing service itself keeps no records and can be trusted to return the same amount of bitcoin.
In addition, some bitcoin wallets have built-in services that help hide identities. For example, they can merge all bitcoins using their service and then give users different feedback upon withdrawal. This, of course, requires a large pool and the absence of detailed records kept by the service.
Still, no matter what methods they use, Bitcoin users will struggle to achieve complete anonymity. At the most, they can make it very difficult and problematic to connect their real-world identities to their Bitcoin addresses. For many, this pseudonymity is enough.
Tip: read our page about the anonymous digital currency: What is Monero?