Are cryptocurrencies really anonymous?

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Nowadays, it seems that everything revolves around privacy. We feel watched by social media, the apps we use and non-stopping geo-localisation.

It’s no wonder people are keen for something untraceable, decentralised and anonymous; something that lets you store as much money as you want, where you have the only key.  

You may be thinking: isn’t that just cryptocurrencies? I’m sorry to have to tell you: untraceable and anonymous cryptocurrencies are still just a myth. 

Forever on the net

If you're an avid reader of the Vivid blog and have been following us for some time, you know what a blockchain is (we talked about it here and here). But in case you're not versed in the subject, a blockchain is an incorruptible digital ledger that can be programmed to record financial transactions, but also everything that has a virtual value. 

When talking about privacy and cryptocurrencies, there is a specific factor to consider. Cryptocurrencies’ blockchains are public. It's possible to see the transactions on every block, forever. This also means that it is possible to see the transaction history of each and every wallet, basically the equivalent of having a public record of transactions for every bank account in the world, forever. Imagine a series of books, the ledgers, where every transaction ever made with a specific cryptocurrency is written. Every person who wants to read those books can do it, and no one can modify what's written there.

What does this ledger look like? Can people actually see my name? No, the actual transaction won't have your name attached to it but rather a string of numbers and letters associated with your account. It will also not reveal the identity of the party to whom you sent your money to. The accounts involved in the transaction would look something like this: 8Gkllji75467n3soij22hk55kn4mm. 

Okay, if everyone can see the transactions but my name is not physically written there, I should be untraceable, right? 

Well, not exactly. Let's dig into that a little bit. 

The early years

Bitcoin was the first crypto ever invented, and it was common to consider it anonymous at the early stages.

It was something that people couldn't fully understand, and the majority of the very first real-life use cases were happening in the darknet, where people used it to buy and sell (mostly) illegal goods. Some famous ones, like Silk Road, had the reputation of having anything for sale, like a global Amazon for criminals. 

People believed that the Bitcoin addresses, made by a long string of numbers and letters, were impossible to trace. To a human eye, bitcoin wallet addresses all look the same because we can't process this information the same way a computer does. But every wallet address is unique and is a pseudonym of its owner's identity. 

When the FBI arrested Silk Road founder Ross Ulbricht, thanks to the market being the middleman of all the transactions, the FBI agents were able to link buyers, sellers and their Bitcoin wallets together. This was the beginning of a blockchain analysis that enabled the authorities to link wallet addresses with real people and their actual addresses. The process of connecting all these dots is called chain analysis, and it's widely used today by the authorities to track this type of criminal activity. The entire Silk Road investigation happened around 2013 when all the big cryptocurrency exchanges were still unregulated. In the last few years, a lot changed. Most crypto exchanges nowadays have to adhere to the basics of know-your-customer and anti-money-laundering procedures. Today, Bitcoin is by far the most analysed cryptocurrency chain. 

The big question 

With all this being said, can you buy cryptocurrencies anonymously?

Let's focus on what kind of actions we can do with cryptocurrencies. We can buy, sell, send and receive cryptocurrencies. Buying and selling are actions that are done in exchange for fiat currencies like euros or dollars. Sending and receiving happens through a third party in exchange for goods or services. That's what happens when you use your Bitcoin to pay for something in a physical shop.

Buying and selling processes are now complicated to do in an anonymous form. By subscribing to one of the traditional crypto exchanges, you have to present your ID or passport, and you'll be part of the exchange database. In addition to that, since most exchanges are registered and regulated businesses, they keep records of funds being sent to wallets. 

To avoid this inconvenience, some services, like peer-to-peer websites, match buyers and sellers for in-person transactions for cash. Still, because governments started scrutinising services with less stringent know-your-customer requirements, most sellers and buyers using these services now transact via bank transfers, which are definitely non-anonymous. In short, the answer is no. 

Attacks on our privacy?

Part of the earlier crypto user base was purely libertarian and, because of that, strongly opposed these changes. That's why some users created what is known as coin mixers or tumblers. This service works by essentially taking your cryptocurrency, mixing it with a giant pile of other cryptocurrencies, and then sending you smaller units of cryptocurrency to an address of your choice, with the total amount you put in minus a fee. This operation is not a guarantee for anonymity but makes tracing much harder. 

With all these changes and new procedures, people started working on creating new cryptocurrencies able to combine anonymity and privacy. Nowadays, we have cryptocurrencies such as Monero, zCash, and Haven with several built-in privacy features. These claim to offer enhanced security features or options that help to keep users' identities and activities hidden. But even with these new super-private cryptocurrencies, the off-ramp dilemma stays. If you need to spend your cryptocurrencies or convert them into regular fiat currencies, the final transaction will always deanonymize you. 

Why be anonymous in the first place? Well, some people don't want hackers to discover that they own a certain amount of cryptocurrencies, while others may have some shady business to cover. Some people also consider privacy a fundamental right — even if they have no intention of doing something embarrassing or illegal, they believe authorities should not have the automatic right to know what they’re up to.

The hard truth is that, nowadays, whatever reason you might have, this privacy is incredibly hard to get.

Any opinions, news, research, analyses, or other information contained on this website are provided as general market commentary, and do not constitute investment advice, recommendations nor should be perceived as (independent) investment research. The author or authors are employed by Vivid and may be privately invested in one or several securities mentioned in an article. Vivid Invest GmbH offers as a tied agent of CM-Equity AG the brokerage of transactions on the purchase and sale of financial instruments with the exception of those in the area of foreign exchange brokered by Vivid Money GmbH.