Bitcoin Privacy 101

It's well-known that Bitcoin transactions are pseudonymous, not anonymous. In fact, Bitcoin is arguably the world's most transparent payment network.

As part of our "Prosper 101" series, we explore the privacy of the Bitcoin blockchain.

Bitcoin's Transparency

Bitcoin records all transactions on a decentralized ledger, and these transactions are visible to the public. Hence, it's possible for everyone to see wallet addresses involved in transactions – belonging to both senders and receivers – and the respective transaction amounts.

Bitcoin transactions are pseudonymous, not anonymous. This means that although the network is designed to be transparent, it is not connected to any personal information such as phone number, name or physical address and does not reveal user identity, and so the identity of a wallet holder is not necessarily known.

How Private is Bitcoin?

Although the Bitcoin blockchain doesn't disclose identities, technically a Bitcoin address can be linked to a real person in some instances. Because the transactions are public, there are a number of tools available that can enable tracing. For example, blockchain explorers allow you to view transaction histories, wallet balances, and activities in real-time. Chain analysis can also deduce whether or not a Bitcoin address belongs to a cluster of addresses.

If a person has previously revealed their identity – perhaps on a centralized exchange – future transactions can then be traced backwards to that person.

However, Bitcoin transactions are not perfectly traceable as Bitcoin uses an unspent output transaction (UTXO) model. A UTXO represents the amount of cryptocurrency remaining after a transaction has been completed, almost like the change received after buying an item in cash. It is a transaction output generated by the Bitcoin network to allow people to make non-exact transactions. These UTXOs make up the beginning and end of a transaction.

Hence, although UTXOs are tracked on the blockchain, even the most simple transactions can have multiple interpretations and are not perfectly traceable.

How to Improve Privacy When Using Bitcoin

Despite being designed with transparency in mind, it is possible to improve privacy when using Bitcoin:

• Use a different wallet address to receive payments
• Don't publish your Bitcoin address on any public websites or forums
• Always hide your computer's IP address
• Buy Bitcoin using a decentralized exchange (DEX)
• Use anonymization strategies to obscure transaction addresses and amounts

Conclusion

Bitcoin is designed to be pseudonymous, meaning that while wallet addresses and transaction details are visible, the identities of the wallet holders are not necessarily known. However, there are ways to improve privacy when using Bitcoin, such as using different wallet addresses, hiding your IP address, and employing anonymization strategies.

Ultimately, the tradeoff between transparency and privacy is an important consideration for Bitcoin users. Though the network's public ledger enables a high degree of transparency, those who value privacy can take steps to protect their identities and transaction details when transacting in Bitcoin.