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February 07, 2024

Anonymity of cryptocurrencies. Myths, mistakes and safety rules

The anonymous cryptocurrencies are a multi-layered and multifaceted problem, and often, the real picture differs from prejudices and stereotypes. We will try to understand how cryptocurrencies work and how you can ensure the security and anonymity of transactions with them.

Nature and features of cryptocurrencies

Cryptocurrencies are digital assets that operate on blockchain technology, guaranteeing operations’ decentralization and transparency. Blockchain is a chain of blocks that stores information about all completed transactions.

The main difference between cryptocurrencies is their openness: each network participant can view the history of all transactions. This is called a public registry. “Addresses” on the blockchain can be compared to public names used to identify people. But they are created from special secret names that only the owners know. Thus, blockchain addresses do not contain personal information about the owners, such as their real names or places of residence. This helps maintain the privacy and security of cryptocurrency address owners.

However, even though the addresses do not contain public information about the owner, they can be attributed to specific people or organizations through points of interaction with the traditional financial system: exchangers, exchanges, wallets supporting KYC (Know Your Customer), and other services that require identification of the user.

Anonymity and transparency of cryptocurrencies

So, anonymous cryptocurrency is a double-bottom topic. As we have already understood, on the one hand, cryptocurrencies do not require personal identification to carry out transactions, unlike traditional banking transactions. On the other hand, all transactions are recorded and viewable on the public blockchain, making them transparent and traceable.

This means that while transactions can be performed anonymously, the anonymity can be broken through the blockchain mining process. This method is used to view and interpret data on the blockchain. Such analysis could allow outside observers to establish connections between different transactions and addresses.

Even if your cryptocurrency addresses were not directly associated with your ID, they could be matched by an investigator with other addresses or transactions that were associated with it. Usage patterns, recurring transactions, and other data can be used to create a profile of activity attributed to a specific person or organization. This is especially true if cryptocurrencies are exchanged through platforms requiring KYC verification and buy crypto anonymously, such as cryptocurrency exchanges.

In general, cryptocurrencies can be divided into anonymous, pseudo-anonymous, and non-anonymous – based on the level of privacy they guarantee.

Ways to maintain anonymity

Maintaining bitcoin anonymity when using cryptocurrencies in countries with repressive regimes is possible, but it requires a thoughtful strategy and familiarity with various alternative methods. Here are some examples of such methods.

Confidential cryptocurrencies

There are cryptocurrencies, such as Monero and Zcash, that were designed with an emphasis on improved privacy. Monero uses obfuscation of transaction data at the protocol level, making it opaque to the public blockchain. Zcash offers a “secure transactions” option that also obscures transaction information.

Anonymity with mixers

What is a Bitcoin mixer and how to buy crypto anonymously? The supposed anonymous bitcoin has misled many users. Several system participants use the blockchain to receive payments of dubious legality or evade tax obligations. But even law-abiding users who make completely legal transactions should ensure their anonymity since, with basic knowledge of blockchain technology, any other participant in the system can quickly obtain information about transfers, your balance, where funds are stored, and withdrawal methods. This transparency of operations makes the user an attractive target for criminals and regulatory authorities. However, there is an opportunity to make it more difficult for them to track transactions. For this purpose, many techniques and specially developed services are used, the so-called Bitcoin mixers, which allow “to confuse the traces.” Bitcoin tumbler is an anonymization service, with the help of which tracking transactions made in the blockchain is made impossible by dividing them into small amounts that are repeatedly moved across different addresses. The user deposits coins into such a crypto mixer, making one transaction and other coins withdrawn, going through many transactions between different tokens, so it is impossible to link them to a specific participant in the system.

Anonymity

Using a VPN or Tor network for transactions can help hide your IP address and increase your anonymity in purchasing bitcoins anonymously or other cryptos.

Decentralized Exchanges (DEX)

Unlike traditional exchanges, DEXs do not require user identification procedures, which reduces the likelihood of de-anonymization. These are exchanges where only peer-to-peer transactions occur – from user to user. This method allows you to bypass centralized exchanges by linking your wallet to your passport, but it still requires you to hide your IP address and transfer coins through a mixer for maximum anonymity.

Disclaimer

In line with the Trust Project guidelines, please note that the information provided on this page is not intended to be and should not be interpreted as legal, tax, investment, financial, or any other form of advice. It is important to only invest what you can afford to lose and to seek independent financial advice if you have any doubts. For further information, we suggest referring to the terms and conditions as well as the help and support pages provided by the issuer or advertiser. MetaversePost is committed to accurate, unbiased reporting, but market conditions are subject to change without notice.

About The Author

Gregory, a digital nomad hailing from Poland, is not only a financial analyst but also a valuable contributor to various online magazines. With a wealth of experience in the financial industry, his insights and expertise have earned him recognition in numerous publications. Utilising his spare time effectively, Gregory is currently dedicated to writing a book about cryptocurrency and blockchain.

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Gregory Pudovsky
Gregory Pudovsky

Gregory, a digital nomad hailing from Poland, is not only a financial analyst but also a valuable contributor to various online magazines. With a wealth of experience in the financial industry, his insights and expertise have earned him recognition in numerous publications. Utilising his spare time effectively, Gregory is currently dedicated to writing a book about cryptocurrency and blockchain.

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