Bitcoin and other cryptocurrencies are traceable. But not all of them. Most of these coins are pseudo-anonymous. By now, most users know this except for a few. All transactions of a cryptocurrency are publicly stored on a ledger called the blockchain. Personal information is not stored on the blockchain. This makes cryptocurrency somewhat anonymous. But it is this very own mechanism of storing data publicly that makes it traceable. There are 2 main ways, cryptocurrencies’ anonymity is defeated:
Cryptocurrency addresses can be linked to real-world identities – If you use an exchange or a wallet, chances are you have given your personal information when signing up. The personal information is tied to your exchange or wallet address. If someone finds this information, they can track all the transactions you have made.
When you send cryptocurrency to someone, your transaction data is sent from a node to a random set of nodes. Nodes that received this data cannot tell where this transaction originated from. But a hacker is able to connect multiple nodes to a network and collect enough data to determine where a transaction is originating from.
How to Reclaim Privacy
There are many ways to anonymize cryptocurrencies. As people find ways to anonymize cryptocurrencies, some find ways to deanonymize cryptocurrency. Here are the most common ways to anonymize cryptocurrency:
Using TOR – Using the TOR browser can anonymize a transaction. When a transaction is sent over the TOR network, there is no way of knowing where the transaction is originating from.
Creating new addresses – Another basic way to anonymize cryptocurrency is to create a new address for each transaction. When you create a new address, it makes it difficult for someone to track you as it requires more clustering to do. You can learn more about clustering here.
Using a Mixer – Using a mixer is another way to anonymize cryptocurrency. In simple terms, a mixer mixes your cryptocurrency with someone else’s and send it to a completely new address owned by you. SmartMix is the mixer service I use. When you receive these coins, it is completely unrelated and will have removed all taints. Some mixers have a random fee and/or random wait time to obscure the transaction even more. Some mixing services allow you to extend the mixing time. Longer the mixing time, more cryptocurrency is mixed with others. For best results, you can repeat mixing a few times. Using a mixer service to anonymize coins is not a perfect solution. The mixer service you use still knows your new and old address.
The best practice is to use all 3 methods mentioned above simultaneously. This makes it very difficult to trace your coins. The last and the best way to anonymize cryptocurrency transactions is to use a privacy coin. For some, privacy is very important. If you want to remain anonymous, privacy coins are your best bet. Unfortunately, criminals also use these coins to engage in illegal activity. So, privacy coins get bad press. But, that should not prevent you from using privacy coins. Privacy coins have legitimate use cases where privacy is important. Before I list the top privacy coins, you must understand the 3 factors which make a privacy coin valuable.
Anonymity – This is the degree to which the coin is anonymous. The degree to which the blockchain is observable and traceable.
Fungibility – This measures how interchangeable the coin is. Can coins be blacklisted, denied or is every coin valued the same?
Decentralization – Who controls the flow of the coin. Do some nodes have more influence than other nodes? Is this coin created by a company?
Best Privacy Coins
Privacy – Monero has several privacy features which makes it truly private. They achieve privacy using 2 features they call: Stealth addresses and Ring Confidential Transactions. You can learn more about them here.
Fungibility – All Monero coins are valued the same and there is no risk of coins getting blacklisted or denied.
Decentralization – This coin is not controlled nor created by anyone. Monero source code is available on Github.
Privacy – Zcash uses a cryptographic method called “zk-SNARKs” (zero-knowledge Succinct Non-Interactive Argument of Knowledge) to make transactions anonymous. In simple terms, it is a way of proving the transaction you are sending to someone is true without having to broadcast it. Transactions that utilize “zk-SNARKs” are called shielded addresses. Although privacy is great, there is a catch. The “zk-SNARKs” privacy feature is only an optional feature. Regular transactions are still traceable and identifiable. So, there are concerns about privacy here. The majority of transactions on the Zcash network are sent without utilizing zk-SNARKs. Besides, utilizing zk-SNARKs is slow and expensive.
Fungibility – In terms of fungibility, coins do have the risk of getting blacklisted. This is because transactions can be traced if you do not utilize “zk-SNARKs”.
Decentralization – The creators of Zcash will take 20% of mining rewards for up to 4 years as a “founders reward”. Creators of Zcash will own 20% of the circulation. In terms of decentralization, it is somewhat centralized because of this. After 4 years, miners will get 100% of the mining reward.
While Monero and Zcash achieve anonymity cryptographically, DASH takes a different route. Dash can be used to send transparent transactions as well as anonymous ones. Dash has a feature called “PrivateSend” which enables anonymous transactions. It utilizes the concept of CoinJoin. Dash achieves anonymity through mixing your Dash coins with others. To achieve this anonymity, Dash requires at least 3 participants. This is very similar to mixer services that make your bitcoin anonymous. But, instead of sending your bitcoins to a mixer service, Dash does this automatically for you.
PIVX stands for Private Instant Verified Transaction. PIVX uses the Zerocoin protocol to achieve anonymity. The way Zerocoin achieves anonymity is with the use of a cryptographic method called “Zero-Knowledge Proof”. In short, this is a way of enabling a party to prove the transaction that is sent is through without broadcasting any information to the public. The only thing that is broadcasted is the fact that coins are sent or received.
So, to answer the question “Is Cryptocurrency Untraceable?”; yes. It is traceable. Even if you use a mixing service, it is still not truly anonymous. If anonymity is your biggest concern, your best bet is to use a privacy coin.