In movies and shows, cryptocurrencies are shown as the best way to move money around anonymously, whether for purposes of money laundering or even just simple tax evasion. However, is crypto anonymous, really, or can you be tracked when using it?
Key Takeaways: Crypto Anonymity
- Most cryptocurrencies, Bitcoin included, are not anonymous but pseudonymous, not hiding your identity as much as giving you a fake one. While a pseudonym can hide you, it’s not foolproof, either.
- Through some smart searching of a cryptocurrency’s blockchain, you could find out the real-world identities behind wallets.
- To combat this, there are some anonymous cryptocurrencies that can hide your transactions, though they’re a minority and not very popular yet.
Turns out that most cryptocurrencies, Bitcoin included, don’t deserve their reputation for secrecy and anonymity. Though they’re a lot harder to track than regular electronic payments, you’re not exactly casting a veil of secrecy over your money when using it. Let’s look at why that is.
No, most cryptocurrency is not anonymous. With some sleuthing, crypto can be linked to the real you.
Bitcoin transactions are not anonymous, but pseudonymous, meaning you’re using a fake name (your wallet address).
Most crypto assets can be traced using wallet addresses, transaction history and, of course, the blockchain. With some work, you could figure out where every Bitcoin ever made is right now, to name just one example.
There are several cryptocurrencies that claim to be completely anonymous and untraceable, such as Monero, Zcash and Bytecoin. How anonymous they truly are, though, remains to be seen.
Is Crypto Anonymous?
The short answer is no, most cryptocurrency isn’t anonymous, although there are a few exceptions we’ll get into later.
Instead, most cryptocurrency is pseudonymous, or replacing your name with a fake one. However, instead of everybody going by the name “John Smith” or something along those lines, your name is replaced with the numbers and digits of your wallet address.
A wallet is where your crypto is stored. It’s a digital space that only people with the address and the access keys can get to and move the contents around. However, it’s also what makes crypto identifiable, since a wallet’s address is kept on a cryptocurrency’s blockchain.
If you need an in-depth reference on what cryptocurrencies are, get back to basics with our article on Cyrpto for Dummies.
How Blockchain Technology Prevents Anonymity
Blockchain technology is what makes cryptocurrency possible. It’s a digital ledger that tracks when a certain token was created and how it has moved around since then, preventing fraud. Of course, the purpose of any ledger is to retrieve information when you need it; if the ledger was anonymous, that wouldn’t be possible.
As a result, any transaction or movement that takes place on a blockchain is recorded, and so is the entity that carried it out. Though your real name won’t be there, your pseudonym — the wallet address — will.
While there are ways around this, it involves adding an extra layer on top of the blockchain; the basics of the technology remain unchanged.
Can Your Crypto Addresses Reveal Your Real World Identity?
Of course, pseudonymous doesn’t mean “out in the open,” either. There’s a good chance that nobody will ever link your cryptocurrency transactions to you.
However, that doesn’t make it impossible. For one, if a crypto exchange knows who you are (via “know your customer,” or KYC identification), they could pass that information along to law enforcement should they ever come knocking with a warrant.
Aside from such judicial muscle, though, there’s no way to directly link a crypto address to any one person. Your name isn’t linked to a wallet, at least not publicly. However, you can look at the blockchain for a specific currency and try to link it with somebody’s known crypto transactions.
Example: Are Bitcoin Transactions Anonymous?
For example, we want to find out which Bitcoin address belongs to Bob. To do so, we need to know something about him, like that last Tuesday he bought two Bitcoin. Then, we’d have to go through the ledger of the Bitcoin network for that day and find all the transactions for two Bitcoin. Since there are likely more than one, we’d have to narrow it down with another data point.
If we know Bob sold one of his coins the next day, that gives us another thread to work on. Alternatively, we can figure out if he bought the coins from somebody we know. For example, if he bought it from a public Bitcoin addresses like that of an exchange or a friend whose wallet address we know, we could establish a link that way.
There won’t be a single event that identifies Bob’s address unless we get very lucky, but by puzzling together enough clues from the list of Bitcoin transactions, we can get to a point where we can say with some certainty which address belongs to Bob and roughly how many Bitcoin he has in it.
It’s a painstaking process, but savvy thinking and some machine learning algorithms make it a lot easier.
Is Bitcoin More Traceable Than Cash?
As a result, Bitcoin and other cryptocurrency are a lot more traceable than cash, and it’s all down to the blockchain, the ledger. Cash doesn’t have a ledger: you can spend a $5 note in a shop now, and tomorrow it could be on the other side of the world and you’d be none the wiser.
Technically speaking, notes can be traced using serial numbers, but that only works if you have a note in your hands. It won’t help you track ones that are out there. With the right tools and enough patience, you can track any cryptocurrency you’d like, as well as its owner, from anywhere and at any time.
Which Crypto Is Anonymous?
As you can imagine, not everybody is happy with this state of affairs. Plenty of people would like their digital assets to be cloaked in secrecy, away from the prying eyes of, well, anybody. While some of the people seeking this kind of anonymity do so to hide criminal activity, there are also those who pursue it in the name of the moral principle of privacy.
No matter the reason, there are a number of cryptocurrencies that offer greater secrecy. They’re all a bit obscure, but the biggest names are probably Monero, Bytecoin and Zcash. What they all share is that they have found ways to obfuscate, or otherwise encrypt transactions, on their respective blockchains.
Monero, for example, randomizes your address for every transaction and also hides the amounts that changed hands. Zcash has written a whitepaper that goes into detail on all the math behind its technology. Bytecoin uses CryptoNote, a technology that effectively places another layer onto the blockchain, making it impossible to see what’s really happening.
Of course, we can safely assume that law enforcement as well as hobbyists are hard at work trying to pierce veils like these by hunting down suspicious transactions or linking known users to purchases. Eventually they’ll succeed and another new anonymous coin will take their place.
The way cryptocurrency works now, there’s no room for anonymity without adding an extra layer. Blockchain technology was designed for transparency, so hiding transactions goes against its grain in every way. Still, with some engineering, you can make crypto harder to trace, maybe even impossible.
Of course, should crypto even be untraceable? What does it matter if anybody knows your true identity? Isn’t anonymous crypto a bigger danger? Let us know what you think in the comments below. As always, thank you for reading.