Bitcoin is often called an Anonymous currency. It is somewhat true, but it’s more accurately called a pseudo-anonymous currency. The reason is, while Bitcoin enables anonymity through a lack of association between people and Bitcoin addresses, there are other ways those correlations can be made.
That being said, Bitcoin is definitely an enabler of Anonymity. You can be completely anonymous with Bitcoins – provided you minimize the information leaks around your transactions. The more you understand how Bitcoin works, the easier it is to avoid these information leaks and remain anonymous.
As an example, let us consider a software developer. His product is completely digital. There is no physical items that need to be shipped. He can receive his project details via email, collaborate via skype, and deliver his product via the Internet, protect the Intellectual Property with encryption, and he can establish a reputation and verifiable virtual identity via digital signatures – and he can receive compensation for his work via Bitcoin. There is no requirement to exchange a real-world identity or items.
To remain anonymous there’s a lot of possible ways to leak who you are, but when care is taken, it can be done.
- Never cross IRL and virtual worlds. If your transactions can remain entirely digital across the Internet, then you can employ other anonymous techniques to maintain your anonymity. This means using things like throw away email accounts, TOR, etc.
- Make sure your bitcoin client (and methods of communication) only route through the TOR network.
- Use new/unique receive addresses for each transaction or, at minimum, sender.
- Maintain separate wallets for each anonymous identity you maintain. This is necessary to prevent “Bitcoin change” from being spent by another identity.
- Launder your Bitcoins before sending between virtual identities.
If real world interaction is required, then you can think about some of these techniques and practices.
- Minimize the information you reveal to your buyers and sellers.
- Create an off-line bitcoin address, send money to it, give the keys to the address (written on paper, as an example) to the seller. They can verify funds via block explorer and immediately transfer money to their own safe address once they have the keys.
A Postscript on Money Laundering
Why is it OK to use encryption to increase my privacy, yet money laundering is illegal? Both are valid techniques to increase my personal privacy. I understand why criminals launder money – but they are criminals doing legitimately illegal acts and will eventually get caught and punished. But the average citizen should not be ashamed to launder their Bitcoins any more than when they use SSL to protect their bank account login.