Most crypto exchanges require your personal information, because of Know-Your-Customer (KYC) protocols. Crypto wallets are only pseudo-anonymous because they still have an address that’s connected to them. The blockchain that most cryptocurrencies use automatically records users’ transactions.
One of the best ways to maintain your privacy when sending or receiving cryptocurrency is to use a VPN. NordVPN is our top pick, as it’s incredibly reliable, uses obfuscation technology, and you can use it to spoof your IP address before you send or receive crypto. Many, including Bitcoin, can be traced. This is possible because transactions for many (but not all!) are recorded on a public ledger, which can be viewed by anyone. Luckily, there are a few cryptocurrencies that were designed with privacy in mind, using a highly secure infrastructure. This article will explain what makes cryptocurrencies private. We’ll discuss the underlying technology, applications, and how you can view transaction records. We’ll also list some popular private cryptocurrencies that are used nowadays.
Why Aren’t Cryptocurrencies Completely Anonymous?
The reasons cryptocurrencies aren’t completely anonymous roughly correlate with the three main steps most crypto owners go through: obtaining crypto, storing it, and spending it (or exchanging it). You’ll find the three main reasons for their lack of complete anonymity in the bullet list below:
Crypto exchanges usually require some personal information about users and identity verification. Crypto wallets are not anonymous, but “pseudo-anonymous.” Transactions are recorded on the public blockchain
Below we’ll discuss these points in more detail.
Crypto exchanges are (usually) not anonymous
The first issue around crypto’s and Bitcoin’s anonymity comes into play when you buy it: you need a crypto exchange. These exchanges generally have to implement Know-Your-Customer (KYC) protocols. That’s because the government of the country in which they operate usually requires this as part of their anti-money laundering regulations.
As a result, most exchanges have to ask customers for proof of identity, such as a picture of their driving license or passport. Popular crypto exchange Coinbase asks for such a document as well, for instance. And then there is another often overlooked thing that prevents complete anonymity on crypto exchanges: your bank account. You need one to use your fiat currency to buy Bitcoin or another crypto. To open a bank account you have to give the bank a lot of your identity-revealing personal information. The crypto exchange links to your bank account, allowing you to buy cryptocurrency in the first place.
Crypto wallets are only pseudo-anonymous
Many believe their crypto wallet must be fully anonymous because its address is composed of random letters and numbers. However, the fact it has an address in the first place automatically means it’s not completely anonymous, but rather “pseudo-anonymous.” After all, your wallet doesn’t identify you directly but can still reveal information about you. After all, cryptos that use blockchain technology record their transactions on the blockchain. The blockchain is public and can be accessed by anyone.
The blockchain reveals your transactions
Let’s say a friend sends you some Bitcoin. He will obviously need your crypto wallet’s address to complete this Bitcoin transaction. When he has obtained this address, he can go to a website that allows him to consult crypto transactions, such as the Blockchain. By typing in or copying your wallet’s address into the search bar, he can see the value of any Bitcoin transactions you’ve been involved in, as well as your current balance. This goes for any cryptocurrency that the website you use allows you to view transactions for.
This goes to show that crypto is not completely anonymous. In fact, to give a more extreme example, criminals that use Bitcoin or other cryptocurrencies for money laundering could even be traced if an informant can get a hold of their crypto wallet address. This makes it much easier to verify previous transactions too. In fact, after a couple from Manhattan stole $3.6 billion from Bitfinex in 2016, authorities went on a six-year hunt to find them, eventually arresting them in February 2022. The stolen Bitcoin was tracked and seized as well. Of course, the pseudo-anonymity of your crypto wallet still offers so much more protection and privacy than just using your name. Nevertheless, it’s important to realize that, just like with virtually any online activity these days, most cryptocurrencies don’t offer complete anonymity. Even so, some users take steps to maintain privacy.
How Certain Cryptocurrencies Maintain User Privacy
You might have heard about private cryptocurrencies. These cryptocurrencies take special measures to improve users’ anonymity. Transactions can’t be traced easily either. In the following paragraphs, we’ll discuss some of the many technologies. Below, we would like to discuss some of the techniques that are commonly used to increase anonymity in the crypto sphere. This way, you’ll have a better idea of the level of anonymity that this type of crypto can give you.
Stealth addresses
Stealth addresses are quite a common way of ensuring privacy when making crypto transactions. This is a great measure that’s used to hide a receiving user’s real crypto wallet address. A stealth address is a proxy address through which crypto will flow to its final destination. This address changes with every transaction. This ensures it’s virtually impossible to track crypto users. After all, the receiving crypto address that nosy third parties will see is just a decoy, so to speak. Needless to say, there are some concerns about the potential use of stealth addresses for illegal activities, with many calling it a double-edged sword. Let’s say a criminal manages to buy cryptocurrency anonymously (which is not impossible). He could then use a stealth address to send his crypto to. This way he could launder the money he gained through illicit activities, without anyone being able to trace it.
Ring signatures
This technique is used to hide the sender’s identity during and after a crypto transaction. The idea is that crypto owners are bundled together in a virtual group during transactions. They all have keys they can use to authorize a crypto transaction. For people analyzing the blockchain, it is impossible to see who exactly authorized a transaction and sent the amount since individual transactions are grouped together. As such, it is (or should be) impossible to identify the sender’s wallet address. Needless to say, the privacy this system delivers improves with every additional user in a group of key owners. This privacy measure was invented in 2001 by three cryptography experts: Ron Rivest, Adi Shamir, and Yael Tauman Kalai. It has since been applied in many different ways. Indeed, ring signatures aren’t just useful for crypto trading. Another way to use it is to bundle several government officials into a group of keyholders. Then one of them can sign an important decree, for instance, without anyone else knowing which official signed it.
CoinJoin
CoinJoin is an open-source privacy solution for Bitcoin and Bitcoin Cash transactions. As the name suggests, crypto senders that use CoinJoin bundle their Bitcoin or Bitcoin Cash together in a pool. They do so by signing a smart contract. After all the crypto has been pooled together, only then will it be distributed among the intended recipients. Every receiver gets exactly the amount that the sender intended to transfer to them, minus the service fee. CoinJoin seems to be a very useful tool. It also seems the developers have really thought things through as far as privacy goes. For instance, you can select your own service fee. You can adjust this fee from 0.1% to 2% with increments of one-thousandth of a percent! This actually prevents blockchain analyzers from finding your output transaction. After all, technically someone can keep track of an amount of Bitcoin being added to the blockchain and then locate the output transaction by looking for the same amount with a standard service fee deducted. Lastly, CoinJoin also allows you to shorten or increase the time after which the bundled crypto will be paid out to all of the receivers. Making this time longer also greatly helps your privacy. After all, this means there will be a lot more blockchain data to analyze.
zk-SNARK
zk-SNARK stands for “Zero-Knowledge Succinct Non-Interactive Argument of Knowledge.” Simply put, this means that this tool allows crypto transactions to happen without the parties, or anyone else, knowing each other’s information. This way, crypto users are able to hide the transaction amount and the wallet addresses involved. Although this might sound counterintuitive, this privacy measure allows transaction parties to demonstrate they have certain information (such as the keys to a certain amount of crypto) without actually revealing this information. This is incredibly useful from an anonymity standpoint. After all, it allows crypto transactions to happen safely and fairly, without compromising your data. zk-SNARK accomplishes this by creating a secret key before every transaction that allows for this verification process. Some people have voiced criticism of zK-SNARK related to the keys it uses. Their criticism is that if someone were to intercept the key they could create false proofs that look legitimate to other users. After all, this secret key determines the workings of the protocol that is used to create the special “verificationless proof” that zk-SNARK enables.
IP obfuscation
A lot of people don’t think about hiding their IP when it comes to crypto transactions. Their main concern is, understandably, hiding their wallet address and transaction amounts. But guess what: blockchains are peer-to-peer networks. This means it’s very much possible for other users to find out your IP address if you’re not careful. In the case of Bitcoin, for instance, users that operate so-called full nodes will have these nodes relay all transactions. This means it’s very easy for them to access and log the IP addresses that are involved with these transactions. If you want to prevent your IP address from being logged and your identity possibly getting discovered during a crypto transaction, we encourage you to either hide your IP address yourself, with a VPN, or use a cryptocurrency that does this for you.
How to Improve Your Crypto Anonymity
While most cryptos don’t offer complete anonymity, there are a few ways to prevent others from tracing your transactions. Here are some tips to help you improve your crypto anonymity.
Bitcoin ATMs
Bitcoin ATMs are essentially just like regular ATMs, but instead of withdrawing or depositing money, they allow you to buy Bitcoin and other cryptocurrencies. Some Bitcoin ATMs also allow you to sell Bitcoin and receive fiat currency (cash). Bitcoin ATMs can greatly improve your privacy when buying Bitcoin and other cryptos. After all, you only need to fill out your crypto wallet’s address to receive your crypto. Furthermore, you can pay using cash, which is arguably still the most anonymous payment method. Unfortunately, for many, this option isn’t nearly as convenient and safe as using an online exchange. For starters, not everyone lives near a Bitcoin ATM or even lives in a country with such an ATM. Secondly, the service fees that these ATMs charge tend to be very high, with fees between 9-12% not being uncommon. Many crypto exchanges, on the other hand, charge less than a 1.5% fee if the crypto you’re trying to buy or sell has a lot of liquidity. Moreover, let’s say the price of Bitcoin dips further and you’re excited to buy a bunch at an affordable rate. Not everyone will feel comfortable taking thousands of dollars in cash to an ATM, and rightfully so. It might be more anonymous than an exchange, but it’s definitely a lot less safe. Therefore, you should ask yourself if the increased privacy Bitcoin ATMs offer outweighs these disadvantages.
In-person crypto trading
Especially just after the inception of Bitcoin, a lot of privacy-minded individuals chose to meet up and buy or sell crypto to or from somebody literally standing across from them. There even used to be events where crypto enthusiasts would gather and do this on a large scale. These days these gatherings still happen in some parts of the world, but they are a lot rarer. Of course, these gatherings don’t need to be big. You could even go as far as to use a forum or something similar (using a false name and email address of course, and ideally something to anonymize your data traffic, such as a VPN) to find people who are interested in this kind of exchange. Needless to say, this approach does have its disadvantages regarding safety. If you think taking a big wad of cash to a Bitcoin ATM is risky, you can only imagine how many things could go wrong when doing the same but with a person you’ve probably never met before.
P2P crypto exchanges
P2P exchanges are essentially a safer version of face-to-face meetups if used right. They are exchanges that allow you to trade crypto with someone without first depositing money into an account. This is why they’re also called non-custodial exchanges. Two examples of these exchanges are Hodl Hodl and LocalCryptos.
On these exchanges, crypto buyers and sellers can find each other to make a one-on-one trade. Generally, these platforms work using smart contract technology. This involves placing the crypto that’s to be sold in a secure temporary wallet. The crypto will be released when the seller confirms (using a special key) that they have received payment. You might ask yourself what happens if the seller doesn’t release the crypto or if the buyer doesn’t pay and as such the seller wants to get his crypto back. Fortunately, there do seem to be creative ways to resolve these types of disputes. One of these is Hodl Hodl.
Hodl Hodl: Solving P2P crypto exchange disputes
Hodl Hodl will act as an arbitrator if two parties have a dispute that they cannot resolve themselves. Either party can click on a button that will start the “dispute procedure.” After this, someone from Hodl Hodl will listen to both parties and allow them to present the “facts of their case,” such as a receipt of payment.
Finally, Hodl Hodl will decide who is in the right and the crypto involved in the trade will be given (back) to this party. They can do so because their temporary crypto storage works with three security keys. One belongs to the seller, another one to the buyer, and the lost one to Hodl Hodl. If two of these keys are used, the crypto will be given to the buyer or the seller respectively.
Bonus tip 1: Use a VPN for extra security and privacy
This tip arguably relates more to security than privacy but does have to do with keeping your sensitive data private. We strongly recommend using a VPN to keep your data and login information to your crypto wallet and exchange private. This is especially important if you are accessing these from an unsecured network, such as a public WiFi network. A very secure and privacy-orientated VPN you can use for this purpose is NordVPN. A VPN, among other things, encrypts your data traffic, making your data unreadable to anyone intercepting it. Needless to say, this is exactly what you want when your private data is concerned, and even more so with something as precarious as your login information to platforms containing your crypto and/or fiat currency.
Bonus tip 2: Get a password manager for maximum crypto security
We also strongly recommend you think of a safe and private way to store the above-mentioned login information. Many crypto wallets use a long security phrase that you have to fill out every time you want to log into your crypto wallet from a new device. Due to the length and randomness of this phrase, it’s virtually impossible to remember. Of course, you can always opt to jot down this information on a piece of paper. However, you might lose this at some point or it could fall into someone else’s hands. That’s why you might want to consider using a secure password manager, such as NordPass. A safe password manager will store your passwords and other information securely. They make use of strong end-to-end encryption to guarantee that only you have access to your passwords and no one else, not even the people working at NordPass.
Five Private Cryptocurrencies for Maximum Anonymity
There are certain cryptocurrency projects that were created with the sole purpose of improving anonymity and privacy. Here are five private cryptocurrencies you should know about.
1. Monero
Monero uses ring signatures and stealth wallet addresses to hide the identity of traders. They also use Ring Confidential Transactions (RCT) to hide transaction amounts.
2. Zcash
They use a cryptographic tool called Zero-Knowledge Proof to allow transactions to happen and be verified without the parties disclosing their wallet’s addresses to each other. The same tool also obfuscates the transaction amount, so people can’t go around looking for interesting large transactions.
3. Verge
This crypto has transactions go through the Tor network to encrypt transaction data and hide the location and IP address of its traders. This means that users operating blockchain nodes cannot see the real IP addresses of the transaction parties.
4. Dash
This crypto uses a feature called CoinJoin, which hides the sender of a crypto transaction. It does this by mixing your coins (between two and 16 times) with other users’ coins. This way outsiders can’t tell where funds come from and you as a sender remain anonymous.
5. Bytecoin
This crypto uses ring signatures to hide crypto senders and the CryptoNote protocol to hide crypto receivers.
The Bottom Line
As we have seen, conventional cryptocurrencies are not quite as private as many believe. This is due to the Know Your Customer (KYC) protocols most crypto exchanges are forced to implement. Another factor is the fact that the blockchain makes most cryptocurrencies only pseudo-anonymous. After all, transactions are recorded and can be viewed by essentially anyone. We’ve also seen there are ways to improve your privacy when using crypto. These include, but are not limited to:
Using Bitcoin ATMs to buy crypto anonymously Engaging in face-to-face crypto trading (not recommended because of security risks) Buying and selling crypto on a peer-to-peer crypto exchange Using private cryptocurrencies, such as Monero or Zcash
Use a Bitcoin ATM to buy crypto using cash. Use face-to-face crypto trading (we recommend avoiding this if possible because of security risks). Use P2P (or non-custodial) crypto exchanges.
Some private cryptocurrencies help protect your identity and keep your transactions private, such as Monero.
