Questions about how identity is tied to Bitcoin and its use are understandable. It can be more than a little confusing to parse what aspects of your name and personal information will be tied to the platform. While it carries a reputation for allowing users to operate in the shadows, you may also know that Bitcoin is tied to distributed ledger technology, which records every transaction and traces them back to their origin. So, is Bitcoin anonymous?
The short answer is no, not entirely. While anonymity indicates that the identity of an actor is unknown, Bitcoin transactions are linked to a specific address and, thus, an “identity.” However, that address does not necessarily have to be tied to a real-life identity. That is why Bitcoin is often described as “pseudonymous.” If a user’s Bitcoin address is tied to their real identity, then it is possible to trace activity back to them. If not, it is possible only to trace activity back to their Bitcoin pseudonym.
Bitcoin’s blockchain-based ledger stores every transaction conducted on the platform forever. The original white paper that launched Bitcoin, “Bitcoin: A Peer-to-Peer Electronic Cash System,” encouraged users to change addresses for every transaction to keep them from being linked together and traced to a single user. However, this won’t guarantee full anonymity, as analysis of the public blockchain can link different addresses together. If, then, even one of the addresses is linked to a real-life identity, all of them can be as well.
There are, though, some methods to increase anonymity, or at least make it more difficult to trace an identity back to the user.
Utilizing a mixing service, which will trade certain bitcoins for others with different transaction histories, can eliminate the ability to match inputs and outputs to a single user. But it’s vital that the mixing service does not keep any records itself and can be trusted to return the same amount of bitcoin that it took.
Also, some online wallets have built-in services that help hide identities. For instance, they can pool together all the bitcoins using their service and then give users different ones upon withdrawal. This, of course, requires a large pool and the absence of detailed records kept by the service.
Still, no matter what methods they employ, Bitcoin users will struggle to achieve full anonymity. At most, they can make it very difficult and problematic to connect their real-world identities to their Bitcoin addresses. For many, this pseudonymity is enough.