Cryptocurrencies are digital currencies that allow users to conduct secure online transactions. “Crypto” refers to the several cryptographic mechanisms such as hashing functions, public-private key pairs that protect these entries.
Bitcoin was brought to light in 2009 by an anonymous developer (or group) using the pseudonym Satoshi Nakamoto. Since then, it has evolved to be one of the most popular digital currencies worldwide. Bitcoin’s value has experienced several boom and bust cycles, making it a volatile asset.
In addition, Bitcoin transactions are recorded on a public ledger known as the blockchain. A network of participants (nodes), maintains this ledger by validating and confirming transactions. In this post, we’ll show you how Bitcoin and cryptocurrencies can enhance your online privacy.
1. Pseudonymous Transactions
Bitcoin transactions are pseudonymous. This means these transactions are not directly linked to a person’s real identity. Instead, every transaction is linked with a special digital address ( just like an email address).
When someone sends you a Bitcoin, the transaction is recorded on the blockchain. While the transaction itself does not reveal the user’s identity, patterns can emerge when analyzing the blockchain data.
For example, if you consistently use the same Bitcoin address for various transactions, it becomes possible to track your activity over time.
This is why it is recommended that you create new addresses for each transaction, reducing the linkability of your activities and enabling you to conduct transactions without revealing your personal information.
2. Decentralization
Unlike other currencies (eg, the US dollar), Cryptocurrencies run on a decentralized network system. This means that there is no central control (eg., central bank,) managing the transactions.
In centralized systems such as traditional banking, a central authority can monitor and track transactions. In a decentralized system (e.g., Bitcoin), no single entity has control or access to all transactions. Besides that, anyone can engage in the Bitcoin network without seeking approval.
This inclusivity increases privacy and this lack of central control makes it harder for external parties to compromise privacy.
3. Encryption
The technology used by Bitcoin, Ethereum, and many other cryptocurrencies is known as public-private key encryption. This cryptographic method enables safe transactions between unknown individuals.
Every cryptocurrency trader usually has two keys: a private key that is kept private and a public key that is disclosed publicly. The sender encrypts the transaction using your public key when they want to send you a Bitcoin. After that, you can access the cash by decrypting them using your private key.
This technique ensures that transactions are secure and verifiable while maintaining privacy.
4. Anonymity Services
Some cryptocurrencies are specifically designed to enhance privacy. These types of cryptocurrencies are known as privacy coins.
Privacy coins employ advanced cryptographic techniques to mask transaction details, sender/receiver identities, and amounts.
The following are some types of these privacy coins
Monero (XMR): To maintain privacy, Monero makes use of stealth addresses and ring signatures.
Zcash (ZEC): To facilitate private transactions, Zcash uses zero-knowledge proofs, or zk-SNARKs.
Dash (DASH): For increased anonymity, Dash enables optional PrivateSend transactions.
To enhance anonymity, you can also employ Tumbling, which involves mixing coins from several users to create a pool of funds.
When you send coins to a tumbler service. The tumbler mixes these coins with others, making it difficult to trace each transaction. Mixing coins breaks the link between the original sender and recipient, improving privacy.
In addition, you can use CoinJoin, which is a technique where several users merge their transactions into a single transaction. This masks the source and destination of funds.
5. Multiple Wallets
Having multiple wallets enables you to spread out your holdings among various addresses. You can compartmentalize your funds by using different wallets for different uses (savings, trading, and spending).
This makes it difficult for hackers to link transactions and identify your overall balance.
Consider the following scenario: You have two wallets: one for daily transactions and the other for long-term investments. If an external party traces a transaction from your spending wallet, they won’t instantly know your entire portfolio.
In addition, having multiple wallets improves privacy and therefore it’s crucial to handle them safely. Use secure passwords, store backups, and consider hardware wallets for long-term storage.
Conclusion
While these approaches improve privacy, keep in mind that no system is 100% reliable. To safeguard your financial privacy in the cryptocurrency world, you should be knowledgeable, follow best practices, and experiment with different privacy-enhancing strategies.
