A Beginners Guide To Bitcoin Privacy (2023)

Photo of author
Athena Alpha

Welcome fren! Bitcoin privacy is always a huge struggle for beginners.

This isn’t surprising given how utterly terrible most mainstream media pieces are on the topic, if they even mention it at all! You might have heard about how Bitcoin is “anonymous”, but that’s complete bullshit. In fact, if it’s used incorrectly (like what most people do) it can actually expose your private details like name, address, transaction data etc to anyone on the entire internet, putting you at real risk of physical harm.

That’s why for our free piece this month, we’re providing a beginners guide to Bitcoin privacy for everyone. If you’re in the Intermediate or Expert levels already then you’ll know most of this. But. If you’re new here then you must read this article before doing anything related to Bitcoin (it’ll save you a crap ton of grief in the future).

First let’s dig a bit deeper into the main question on your mind.

Are Cryptocurrency Transactions Anonymous?

They way 95% of people use it, no.

Bitcoin is pseudo-anonymous. This means Bitcoin transactions don’t use names or accounts like what your bank does. Anyone, anywhere can download some software and generate their own Bitcoin Address such as:

bc1qelem0ann687r2e9jax542lja7q8cu8s35h96pc

Now while this is technically “anonymous”, there are many ways your real world identity can be linked to that address. Forever. Whether it’s via your IP Address or you willingly telling an online exchange that “I’m John Smith” when you create your account and buy your coins, it’s something that’s becoming more and more common these days.

That’s why when it comes to Bitcoin, it’s especially important to know and practice good privacy. While other cryptocurrencies have been created to be “more private than Bitcoin”, they don’t have the decentralisation, network security or network size that Bitcoin does and so aren’t really a great solution either. It’s also not something we know a great deal about as we only focus on Bitcoin here. There are like, 20,000+ other shitcoins out there after all and there’s no way we could cover them all!

The Importance Of Privacy

Usually most people are interested in the anonymity of Bitcoin because they’d like to keep their transactions private. Privacy is recognised as a fundamental human right by a number of international bodies like the United Nations. However many people in general still cling to the ridiculous “if you’ve got nothing to hide, then you shouldn’t mind them looking” notion.

This is clearly a nonsense argument. For example, you might walk around your house naked and if so more power to you… but I’m pretty sure you don’t want people staring in from the street so you close your blinds. You don’t have anything to hide and obviously aren’t doing anything illegal, but most of us like to keep our private parts well… private.

Home-Simpson-With-A-Towel

This right to privacy is extremely basic and extends to your finances as well. I think we would all agree that random strangers shouldn’t get to know all the things you spend your money on. But with the current fiat banking world, they do. This is where, when used properly, Bitcoin can help.

Bitcoin Privacy vs The Internet

When it comes to privacy on the Internet you can sometimes afford to make a mistake. This is because you can have articles updated or removed if they’re inaccurate or wrong. You can delete that really bad Tweet before everyone sees it or request Google to take down some search results if you want.

GDPR in particular has been excellent at giving broad, powerful privacy rights to citizens when it comes to their data and removing or changing it. On top of these active things you can do, the Internet also slowly forgets content over time as well. Even though many like to claim “the Internet never forgets” it absolutely does. A lot! That’s why there’s projects like the Internet Archive.

Bitcoin is different.

As was covered before under How Long Does Bitcoin Take To Send?, once a transaction is enclosed in a block and confirmed by the network it is impossible to change or remove. For eternity, anyone and everyone will be able to look back on it. It will be replicated onto every Bitcoin Full Node all around the world.

It is hard to remove information from the internet
It is impossible to remove information from Bitcoin’s public ledger

Gigi

This is why privacy in Bitcoin is so critical, even more critical than your privacy on the broader internet. While there are some parts that aren’t so damaging there are a few that are incredibly and eternally damaging to you and your precious stash. But don’t get too scared, while Bitcoin isn’t super private by default, it’s not hard to make it that way.

New to Athena Alpha? Start today!

Don’t Use KYC/AML Exchanges

KYC (Know Your Customer) and AML (Anti Money Laundering) are regulations that all crypto exchanges like Coinbase or Binance have to comply with. It’s why they require you to “verify your identity” before they let you do anything. They want to know you name, address, drivers license, photo and more. This is just the beginning though.

All the big Bitcoin exchanges enforce KYC and once you give them your private information they then link whatever bitcoin you buy to that identity. Forever. This obviously breaks the natural pseudo-anonymous nature of Bitcoin and from there the exchange, the government, third parties and chain analysis firms…

  • Track what you spend your money on
  • Track what your balance is
  • Track what taxes you should be paying
  • Sell all this information to other companies without telling you
  • You get the picture

It gets worse though because as we all know, companies get hacked and your data spills out for criminals and scammers to buy and use. Whether it’s due to poor security, companies accidentally publishing their own data, companies having their data stolen or companies having unprotected APIs, absolutely no company no matter how big is immune.

So what do you think happens when exchanges collect highly specific, personal financial information on millions of users that basically says “John Smith has $1m in Bitcoin and lives here”? Yeah. They get hacked and now bad people know how much Bitcoin you own and where to go to beat you with a $5 wrench.

Security-$5-Wrench-Problem
Source: XKCD

The exchange can also confiscate or block you from being able to access your crypto too. Don’t believe us? Just check out this super not at all helpful page from Gemini telling you all the ways they’ll stop your from accessing your funds! How convenient!

Given this severe, eternal and unnecessary invasion of your privacy combined with the certain reality that all your private information will be hacked eventually, you should only use non-KYC exchanges to buy your bitcoins. While it has a little bit of a learning curve to begin with, it’s by far the best thing any Bitcoin Beginner can do. Examples of non-KYC exchanges or sources include:

Self-Custody Your Coins

Not your keys, not your coins.

Holding your own private keys is the next most important thing to do when it comes to Bitcoin privacy. Whoever holds your keys knows everything. Your balances, your transactions, the senders and receivers, everything. You have zero privacy.

It also allows them to sensor, kick ban you or even spend your funds. Many who have trusted third parties with their keys such as centralised crypto exchanges have lost all their bitcoin. People have even lost their fiat money (USD, Euro etc) by using Fiat Wallets too. Examples include: MtGox, Cryptsy or CoinEx. If you have funds on a centralised exchange. Get. Them. Off. Now. You’ve been warned!

To take custody of your own private keys means you’ll need to download and install your own Bitcoin Wallet software. If you’re a Beginner, just focus on setting this up and ensuring you only buy from non-KYC sources as described above. Examples of good Bitcoin wallets include:

Also make sure you backup your seed phrase, it should be resistant to theft, loss due to forgetting and fire/water/degradation damages.

Don’t Reuse Addresses

Bitcoin Address reuse is basically an accident and shouldn’t ever be done. Doing so not only kills your privacy but the other persons too. Most modern wallets do this automatically for you now though so it’s not a big issues, it’s just something to make sure you never do.

Each time you receive funds it should go into a brand new address. Once those funds are spent that address should never be used again. All the wallet software listed above never reuse addresses.

Don’t Use Public Block Explorers

Looking up addresses or transaction ids on a public block explorer will link those Bitcoin Addresses with your IP Address which, in turn, can be linked to your real world identity. Full Bitcoin Nodes like Umbrel and myNode make it easy to run your own block explorer.

If you don’t have your own Full Bitcoin Node and have to use a public block explorer, make sure to mask your IP by connecting to them via Tor, or at least use a VPN. More broadly, you should avoid or minimise third parties as much as possible as they’re always huge privacy and security holes.

Bitcoin Surveillance And Chain Analysis

Finally you should be aware that surveillance of the open Bitcoin blockchain is something that happens on a massive scale. Chain Analysis companies are a thing and work together with centralised exchanges and other data mining operators to gather the most complete picture they can in order to sell this data to anyone and everyone.

Chain analysis is the application of various heuristics to try and give a best guess as to who likely owns what bitcoins. This is possible because the Bitcoin blockchain is open and free for anyone to view. You don’t need to know how this all works, you just need to know that these companies exist and work closely with governments.

For it to be useful, they have to be able to link the bitcoin trail to a real world identity though. This is mostly done via KYC/AML exchanges so by only using non-KYC exchanges to buy your bitcoins you side step this significant privacy violation.

The Athena Assessment

Bitcoin privacy is constantly changing with new Bitcoin protocols, wallet features and more all tied up with the individuals specific situation. Some are buying $20 worth of shitcoins and so don’t care if their exchange “knows all their info”. Others have hundreds of thousands of dollars worth of bitcoins and absolutely should have at least Intermediate level privacy and security (check out our Guide To Advanced Bitcoin Privacy).

This is just a beginners guide, so we haven’t covered other important things like hardware wallets (aka signing devices), using your own Full Bitcoin Node, Tor, Coin Control, CoinJoin and more. We’ll be diving much deeper into each of these recommendations with detailed step-by-step instructions for our paid subs.

Understanding Bitcoin is a journey and a big part of that is learning about privacy and security. Don’t feel like you need to implement all privacy measures right from the start. You’re a beginner, so focus on just the main two beginner tasks: buying from non-KYC sources and owning your private keys.

Over time as you gain understanding you can move up to an Intermediate level and then Expert. This is why we have our Bitcoin Levels! To help guide everyone no matter what their background.

LevelBeginnerIntermediateExpert
Funds AmountPocket MoneySavings AccountSerious Investments
Exchange TypeNon-KYC
Decentralised
Non-KYC
Decentralised
Non-KYC
Decentralised
Wallet TypeSoftware (Hot) /
Hardware (Cold)
Hardware (Cold)Hardware (Cold)
Signature TypeSingle SignatureSingle SignatureMulti Signature
Key CustodySelf CustodySelf CustodySelf Custody
Key BackupLaminated PaperLaminated PaperMetal Seed Plate
Key Locations1+2+2+
Key SecurityNoneFire Proof SafeMultiple Methods
Own Full NodeNoYesYes
Electrum ServerPublic Electrum
toggle_on
Private Electrum
toggle_on
Private Electrum
toggle_on
TorNoYesYes

Other Resources:

FAQ

Is Bitcoin Traceable?

As the Bitcoin blockchain is public and permanent, Bitcoin is indeed traceable. Due to the way addresses are represented by essentially random alphanumeric characters, users identities are obscured, but not necessarily hidden.

As such, if your real world identity is linked to a Bitcoin Address it’s possible to then trace those funds via chain analysis and other methods. This is how many criminals have been caught when using Bitcoin and is why many of them have now moved onto other cryptocurrencies.

Is Cryptocurrency Traceable?

With over 20,000 different types of cryptocurrencies there’s a wide range of answers to this question. While some coins are purposefully designed to be as untraceable as possible, others are fully centralised tokens that you can only purchase by verifying your identity first.

As such, to know how traceable or private your cryptocurrency is it’s best to look at privacy guides for that specific one and not the broad category of “crypto” as otherwise you’ll likely get incorrect information.

Is Bitcoin More Traceable Than Cash?

When most people spend cash there is typically no record of it, however with Bitcoin every transaction is recorded on the Bitcoin blockchain forever and is open for all to see and inspect. As a result, Bitcoin is far more traceable than cash.

Can Bitcoin Transactions Be Traced?

As the Bitcoin blockchain is public and permanent, Bitcoin transactions are indeed traceable. All you have to do is enter the transaction id into any blockchain explorer website and you can see exactly where all the different outputs go.

Finding out who owns those transaction outputs is a completely different matter though and why chain analysis companies exist. This matching up of addresses and identities can be done through KYC exchanges or other heuristics.

Does Bitcoin Have Privacy?

Privacy is being able to selectively reveal yourself. It’s freedom from unauthorised intrusion or observation. As the Bitcoin blockchain is completely open and transparent, anyone can “observe” your transactions.

All transaction are pseudo-anonymous though and don’t contain names or real world identities. So while Bitcoin is open and allows anyone to view its transactions, it does have privacy as you are allowed to selectively reveal yourself (the act of proving you are the owner of certain bitcoins).

How Can I Increase My Bitcoin Privacy?

For beginners the two most important steps to increasing your Bitcoin privacy are:

1. Don’t Use KYC/AML Exchanges
2. Self-Custody Your Coins

Once you have mastered that you should look into other important things like hardware wallets (aka signing devices), using your own Full Bitcoin Node, Tor, Coin Control and CoinJoin.

Can You Own Bitcoin Without A Wallet?

No. Bitcoins need an address to be sent to which is generated by a Bitcoin Wallet. While most people assume keeping their bitcoins on an exchange means they don’t have a wallet, that is still a wallet. It’s just an online or “hot” wallet that you don’t have custody over.

Want to get serious about safely and privately using Bitcoin? You need to subscribe now.

Try it for free. No spam. No selling your data. No BS

Benefits Include:
Learn more about Bitcoin than 99% of people in just one hour a month
Secure your Bitcoin investments and ensure they stay safe from hackers
Know what risks your investments are exposed to and how to fix them
Keep pace with Bitcoins rapid growth and what opportunities it enables
Get insights into how Bitcoin can help your business or work save thousands
Step-by-Step guides for all aspects of Bitcoin (wallets, buying and more)
How to do all of these things and maintain your privacy!
NO MORE LOST FUNDS!