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Guide to Using Bitcoin Anonymously

10 mins
Updated by Ryan Glenn
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Bitcoin was envisaged over a decade ago as a hedge against a failed banking system that brought about the 2008 financial crisis. Part of becoming ‘unbanked’ was the ability to carry at financial transactions anonymously. Banks want to know pretty much everything about their customers and their finances, and Bitcoin provides an alternative to this intrusive system.

Bitcoin partially provides that anonymity but there are still ways that blockchain transactions can be traced. This guide will delve into the properties of blockchain anonymity, and explore ways to use Bitcoin and convert Bitcoin to cash anonymously.

Centralized crypto exchanges have replaced banks in that they too require personal information, and can monitor transactions. There are a number of ways to retain full anonymity when using Bitcoin, but they do involve a few additional steps.

anonymous

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 native 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 public ledger.

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 active address
  • Which address sent and received the bitcoins
  • When the transaction took place

To understand Bitcoin anonymity, a little background on how transactions work is necessary. BTC transactions work using unspent transaction outputs (UTXOs), which are the result of a transaction that a user receives and is able to spend in the future. It has been designed this way to prevent double-spending as every UTXO can be spent only once. After this has occurred, one or more new UTXOs are created and sent to the appropriate wallets. The diagram below shows the basics using satoshis.

bitcoin UTXO
Sample BTC UTXO using satoshis – researchgate.net

Because Bitcoin is a public blockchain, it allows anybody to 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, like banks, have been forced by governments to demand a raft of personal information from their users under strict Know Your Customer regulations (KYC).

Bitcoin Tracing Services

As a testament to this general lack of real anonymity, the number of blockchain tracing services has exploded in recent years. Fueled by an increasing number of scams, hacks, and general crypto crime, these firms offer tracking services to exchanges and law enforcement departments, or those wanting more information on the people behind certain Bitcoin transactions. Companies offering such services include Chainalysis, CipherTrace, and Elliptic, though there are a lot more.

Bitcoin tracking is increasing at unprecedented levels as the crypto industry is following the regulatory path that applies to traditional banking. More exchanges are using risk scoring on transactions that assigns them a percentage based on the origin of the transaction. Anything from the dark web is automatically flagged and automatically sent to authorities’ databases.

How to Cash Out Anonymously

With this knowledge in mind, it has become clear that using Bitcoin is not really an anonymous way of moving money at all. Due to the nature of cryptocurrency, however, there are further steps that can be taken to increase the anonymity of a transaction.

Many exchanges, just like banks, have limits on how much can be sent out of the account at a time. These limits are even more stringent when national currency is involved. This is because the banking system has limited the amount of money people can move in recent years. All of this extra legislation is in the name of anti-money laundering (AML) and counter-terrorism protections. As usual, it is the innocent that get punished when these sweeping regulations come into place.

bitcoin privacy

Cashing out of Bitcoin can be done via banks and ATMs. The first option has no anonymity whatsoever as a bank knows more about you than your own mother. Today it is virtually impossible to even open a bank account without several proofs of a physical address. That leaves Bitcoin ATMs as the way to cash out.

Before this is done the funds must be broken into smaller denominations than your exchange or BTC account allows you to withdraw. It should also be converted into a more private digital currency, such as Monero or Dash, and sent to individual private wallets. Only then can it be converted back into BTC and withdrawn at various ATMs.

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:

  1. Start with 10 BTC (for example)
  2. Convert BTC to XMR (Monero)
  3. Break into denominations of around $1,500
  4. Send each denomination to a different wallet address
  5. Convert XMR back into BTC
  6. Withdraw BTC at various crypto ATMs

Naturally, there will be a number of fees and commissions to pay along the way but they are likely to be way lower than any potential tax bill a sum of that magnitude may attract.

Using a fiat withdrawal from an exchange is not recommended as it involves using a bank or payment provider, such as PayPal, which of course are all KYC regulated.

KYC

Internet Privacy

Although it is largely beyond the scope of this guide, internet privacy needs a mention 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. Internet providers across the globe have the ability to store everything that is transmitted over their networks. A VPN routes the data anonymously via servers in other countries to add extra privacy to communications. There are many commercial options 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 Duck Duck Go instead of Google prevents data harvesting, and avoiding insidious platforms such as Facebook all together will ensure further online anonymity.

Tor

Anonymous Trading Options

Peer to peer (P2P) trading is preferable over centralized exchanges for those that 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.

Localbitcoins matches Bitcoin buyers with sellers directly; it is popular in countries where exchanges and crypto trading is restricted. It is not especially useful for anonymous trading though since there are KYC requirements, and it removed local cash trading last year to comply with regulations.

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.

Paxful has an optional identification provision requirement, but seasoned traders are less likely to deal with the totally anonymous so cashing out may be a challenge. There is also an option of physically meeting people near your location to carry out trades which also does not require any proof of identity.

Bisq is an open-source, peer-to-peer application that allows users to buy and sell cryptocurrencies in exchange for fiat. It is a piece of software that runs on your computer and does not require registration or identity documentation. However, the transfer of national 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 more popular decentralized exchange platforms at the time of writing include:

  • Changelly
  • Shapeshift
  • Kyber Network
  • IDEX
  • Bisq
  • Uniswap

Some of the larger centralized exchanges, such as Binance, also have their own DEX, but you’ll be accessing it 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 a Mixer. Mixing is a process that enables multiple BTC transactions to be ‘mixed’ in order to obfuscate their origins.

It has largely been seen as the realm of criminals by governments, but there are many genuine reasons to want extra privacy with financial transactions or purchases.

Bitcoin mixing
Bitcoin mixing example – keysheet.io

Mixing, or tumbling as it is often called, uses a service to ‘shuffle’ Bitcoins with other people’s in order to mix up the transactions and obscure the path of the sender to receiver. They don’t necessarily help when trying to sell BTC to fiat but are a very good option for those wanting more anonymity with transactions.

Third-party centralized mixers will take a cut of between 2 and 5 percent which is why it is better to use a decentralized solution. Additionally, the mixer will have access to the information that the user is trying to obfuscate, so a deep level of trust is needed.

CoinJoin is one solution that lets multiple users combine all inputs and outputs from several transactions into a large single transaction. It has been implemented in both centralized and decentralized Bitcoin mixers.

Using privacy-focused crypto wallets such as Wasabi or Samourai is a good option as they have mixers such as Chaumian, which provides blind signatures, and CoinJoin built-in. These wallets are open-source and non-custodial, offering the best decentralized solutions for BTC transaction anonymizing.

Anonymous and Privacy Cryptocurrencies

Bitcoin is not the only cryptocurrency, and a number of others have emerged over the past few years that focus on privacy and anonymity. They are often used as an intermediary when anonymizing Bitcoin transactions as they have privacy protocols built-in. Unfortunately, due to increasing regulatory pressure, many exchanges are not listing some of these privacy coins.

bitcoin privacy
  • Monero (XMR) – the most popular privacy coin with default anonymity features including private network transfers, mixing services, ring signatures, and fungibility. Unfortunately XMR is also a favorite for hackers and scammers.
  • Dash (DASH) – well adopted, fast transaction crypto with PrivateSend feature that offers mixing services.
  • PivX (PIVX) – fork of Dash that uses proof-of-stake consensus and community-run masternodes.
  • Zcash (ZEC) – provides full anonymity through the use of zero knowledge proofs (zk-SNARKS) to obfuscate transactions.
  • Verge (XVG) – uses TOR network integration and I2P tunneling to keep transactions private and peer to peer.
  • Bytecoin (BCN) – uses CryptoNote technology and band signatures, hard forked to create Monero in 2014.
  • Grin (GRIN) – employs the Mimblewimble protocol which allows previous exchange information to be deleted.

These are just a few of the many privacy-focused altcoins available; others include Horizen, Bitcoin Private, Navcoin, Particl, Komodo, Super Zero, and Zcoin.

privacy coins

Conclusion and Resources

Bitcoin ATMs are the best way to anonymously cash out into fiat since the majority of exchanges, payment providers, and all banks, are now demanding reams of personal information. Governments around the world have grown increasingly paranoid about money laundering, tax evasion, and terrorism. This has resulted in massive surveillance of money movements for individuals and businesses.

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.

Coinatmradar.com – maps showing the locations of crypto ATMs around the world.

Wasabi Wallet – open-source, non-custodial, privacy-focused Bitcoin wallet for desktop.

Samourai Wallet – bitcoin wallet offering private transactions and masked identity.

Bisq – peer to peer desktop-based crypto trading application with no registration.

Brave – privacy-based web browser with crypto rewards platform.

Paxful – peer to peer Bitcoin and crypto trading marketplace.

Disclaimer: BeInCrypto does not support illegal activity and we urge all readers to abide by laws. This article is for educational purposes. 

Frequently asked questions

What is Bitcoin?

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Is Bitcoin safe and legal to use?

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Martin Young
Martin Young is a seasoned cryptocurrency journalist and editor with over 7 years of experience covering the latest news and trends in the digital asset space. He is passionate about making complex blockchain, fintech, and macroeconomics concepts understandable for mainstream audiences.   Martin has been featured in top finance, technology, and crypto publications including BeInCrypto, CoinTelegraph, NewsBTC, FX Empire, and Asia Times. His articles provide an in-depth analysis of...
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