Bitcoin partially provides anonymity, but blockchain transactions can still be traced in many ways. Centralized crypto exchanges have replaced banks in that they, too, require personal information and can monitor transactions. This guide will explore ways to use Bitcoin and convert Bitcoin to cash anonymously on exchanges.
KEY TAKEAWAYS
• Using new Bitcoin addresses and privacy preserving technology while browsing the internet is important for remaining anonymous.
• Bridging assets, Bitcoin mixers, and silent payments allow users to break their Bitcoin transaction trail.
• Bitcoin ATMs and peer-to-peer trading helps Bitcoiners cash out while maintaining their privacy.
• Despite common misconceptions, Bitcoin is not inherently anonymous, and various methods can trace your transactions.
How to use Bitcoin anonymously
Bitcoin does not represent an anonymous way of moving money. Due to the nature of cryptocurrency, however, there are steps that you can take to increase the anonymity of your transactions. You can use Bitcoin anonymously by:
- Use new addresses
- Cash-out with Bitcoin ATMs
- Bridge assets
- Internet privacy
- Peer-to-peer trading
- Bitcoin mixing services
- Silent payments
Here’s a look at each of these methods in a little more detail.
Use new addresses
The traditional way to maintain privacy while using Bitcoin has been to generate a new address whenever you receive Bitcoin. Using the same addresses to receive Bitcoin increases the likelihood of someone tracing you on the blockchain, even if you send the BTC that you received to another address.
If an attacker sends dust to an address that the user has reused, they can monitor how this dust interacts with other addresses associated with that address. A dusting attack is when malicious actors de-anonymize users by sending tiny amounts of the cryptocurrency (often referred to as dust) to a large number of addresses.
Although using new Bitcoin addresses is a great way to start maintaining privacy, bad actors are becoming more sophisticated, which requires users to use more up-to-date methods to remain anonymous.
Bitcoin ATMs
Cashing out of Bitcoin can be done via Bitcoin ATMs. Bitcoin ATMs are kiosks that allow users to buy, sell, and withdraw cash using Bitcoin. Unlike traditional ATMs, Bitcoin ATMs connect to exchanges rather than banks. Users should keep in mind that not all ATMs are privacy-preserving.
Certain countries have specific laws regarding the collection of customers’ information. Therefore, ATM businesses must adhere to these laws to continue to support Bitcoiners. However, some ATMs require little to no KYC.
Typically, customers will have to KYC when they reach a certain threshold for purchasing or selling Bitcoin.
For example, when you withdraw money from Bitcoin ATMs, you may request $100 without KYC. On the other hand, if you request $5,000, you will likely have to KYC.
Bridging assets
When you want to maintain privacy with Bitcoin, you should also convert it into a more private cryptocurrency, such as Monero or Dash. Then, you can convert it back into BTC and withdraw it at various ATMs or other methods. This is called bridging or chain-hopping.
The process is a little convoluted, but it is one way to obfuscate the transaction chain and cash out anonymously. Here is an example of the process:
- Start with BTC
- Convert BTC to XMR (Monero)
- Break into denominations (e.g., 1, 2, and 5 XMR)
- Send each denomination to a different wallet address
- Convert XMR back into BTC
- Withdraw BTC at various crypto ATMs
Bridges are a popular method that traders and hackers use to obfuscate their Bitcoin transactions. A bridge is a protocol or service that transfers cryptocurrency from one blockchain to another. The reason this method is useful is because it is difficult to resolve the ledger of one token on another blockchain, and bridging breaks the transaction history.
Naturally, there will be a number of fees and commissions to pay along the way. Using a fiat withdrawal from an exchange is not recommended as it involves using a bank or payment provider, such as PayPal, which is, of course, KYC-regulated.
Internet privacy
Although it is largely beyond the scope of this guide, internet privacy needs to be mentioned as it goes hand in hand with crypto anonymity. Using a Virtual Private Network (VPN) when online and dealing with crypto is also a very good idea, as it encrypts the data and anonymizes your IP address.
Looking to improve your online privacy in 2024? Check our guide to the best VPNs on the market today.
Internet providers worldwide can store information transmitted over their networks. A VPN routes the data anonymously via servers in another country or area to add extra privacy to communications. Many commercial options are available for a fee, but TOR is a free alternative.
Privacy-based browsers, such as Brave, also add another layer of security over online activity. Using alternative search engines such as Opera or Duck Duck Go, private emails like Proton, and one-time emails and phone numbers all help to remain anonymous on the internet as well.
You should not use the TOR browser with other VPNs, give sensitive information when using one-time email and phone numbers, or resize or go full screen with TOR, as it could compromise your anonymity.
Peer-to-peer trading (P2P)
Peer-to-peer (P2P) trading is preferable to centralized exchanges for those who need more anonymity in their transactions. However, this method is not completely infallible, as some form of identity is required to ensure the level of trust that is needed for this type of trading on larger platforms. Some places where you can trade P2P are:
- Paxful is a better option for anonymous Bitcoin trading. The platform claims to provide over 300 ways to buy and sell BTC, these include traditional methods such as banks and payment providers and more obscure ones such as gift cards and barter.
- Bisq is an open-source, peer-to-peer application that allows users to buy and sell cryptocurrencies in exchange for fiat. It is software that runs on your computer and does not require registration or identity documentation. However, the transfer of fiat currencies still requires traditional payment channels such as banks and payment processors.
Decentralized exchanges (DEX) are good for anonymous trading, but very few of them deal with banks or payment providers. Some of the most popular decentralized exchange platforms include:
- Changelly
- Shapeshift
- Kyber Network
- IDEX
- Bisq
- Uniswap
Some of the larger centralized exchanges, such as Binance, also have their own DEX and P2P markets, but you’ll access them through your regular account, which is not very anonymous. A lack of liquidity is often a problem with decentralized exchanges, so converting large quantities of crypto can be a challenge.
Bitcoin mixing services
Another way of anonymizing Bitcoin transactions is to use Bitcoin mixers. Mixing is a process that enables multiple BTC transactions to be “mixed” to obfuscate their origins. Governments have largely seen this as the realm of criminals, but there are many genuine reasons to want extra privacy with financial transactions or purchases.
Mixing, or tumbling, uses a service to “shuffle” your Bitcoin with that of others, in order to mix up the transactions and obscure the path of the sender to the receiver. They don’t necessarily help when trying to sell BTC to fiat, but are a good option for those wanting more anonymity with transactions.
Silent payments
Silent payments are a privacy-enhancing technique proposed for Bitcoin. They allow a sender to transfer funds to a recipient without the recipient needing to reveal a specific public address in advance.
The public key that is a component of your silent payment address is used by the recipient to construct a one-time, unique address that appears identical to any other Taproot address. They then combine this unique public key with the public keys of the outputs they wish to transfer.
You can then validate and spend from this distinct one-time Taproot address created by combining these three keys. The primary drawback is that this is a recent technology and computationally more expensive than merely scanning the UTXO.
Is Bitcoin really anonymous?
The Bitcoin network itself can be described as pseudo-anonymous. It provides much more anonymity than a bank but is not fully untraceable in its current state. Unlike other digital accounts that are linked to an email address, personal identity, or physical address, Bitcoin addresses are alphanumeric strings recorded on the blockchain.
While online anonymity stands for hidden identity, online pseudonymity identifies with shielded identities. If you’re still unsure of the exact difference between anonymity vs pseudonymity, check our comprehensive explainer.
Anything public, such as the Bitcoin blockchain, is accessible by everyone, so personal identities can still be traced through internet addresses (IP) and other forms of data analysis. Any Bitcoin transaction will yield the following information:
- How many Bitcoins are held by the address
- Which address sent and received the bitcoins
- When the transaction took place
Because Bitcoin is a public blockchain, anybody can check UTXOs for any address. This essentially means that if somebody knows a BTC wallet address, they can check all of the previous transactions and the wallet balance at any point in time. This is not very anonymous by any means.
The anonymity is further eroded when these Bitcoin addresses are linked to more personally identifying addresses used to convert cryptocurrency into fiat. Centralized exchanges are the prime culprits here, as they often demand personal information from their users.
Bitcoin tracing services
The number of blockchain tracing services has exploded in recent years. Companies offering such services include Chainalysis, CipherTrace, and Elliptic.
Fueled by an increasing number of scams, hacks, and general crypto crimes, these firms offer tracking services to exchanges, law enforcement departments, or those wanting more information on the people behind certain Bitcoin transactions.
You can remain anonymous with Bitcoin
Governments around the world have grown increasingly paranoid about money laundering, tax evasion, and terrorism, which has resulted in massive crackdowns on transactions. Conversely, this has led to Bitcoin and cryptocurrency users handing over loads of sensitive information that could lead to compromises and hacks.
Cash and Bitcoin are still relatively anonymous, but as this article has highlighted, both can still be traced. A few extra steps are needed to use cryptocurrencies with full anonymity, and the following resources will assist that process. By using Bitcoin anonymously with mixers, bridges, silent payments, and other methods, you can remain safe while transacting.
BeInCrypto does not support illegal activity and we urge all readers to abide by laws. This article is for educational purposes only.
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