The notion that Bitcoin is completely anonymous is a widespread one. It is also incorrect even though transactions involving Bitcoin do not involve the transmission of personal information. It is possible for Bitcoin owners to protect their identity to a certain extent, but not completely. An individual can spend Bitcoin without using their name but their transactions can be connected to the addresses whereby they receive Bitcoins. If those addresses are ever tied to their personal identity, all the transactions associated with them will be tied to their identity as well.
It is widely recommended that Bitcoin owners use a new address for each transaction. While this method does help with anonymity, it is flawed. For a better understanding of why Bitcoin cannot be truly anonymous, it is important to know how the cryptocurrency works.
Each Bitcoin transaction involves inputs and outputs with inputs being the addresses from which Bitcoin is sent. Each of the addresses has a private key and the Bitcoin can only be transferred using the private key from the address. The outputs are the addresses that receive the Bitcoin. Usually, a transaction requires Bitcoin to be moved from one or more inputs to one or more outputs.
Most transactions involve the merging several smaller inputs and outputs. If an individual controls two inputs of one Bitcoin each and they want to buy an item for 1.5 Bitcoin, then those inputs will be merged to make up one transaction. The transaction will also involve multiple outputs since a change address will be necessary. In the above example, the extra 0.5 Bitcoin will be sent to the buyer’s change address.
Ways in Which Bitcoin Anonymity Can be Compromised
- Connecting Nodes
The Bitcoin peer-to-peer network is not completely secure. It may be possible for attackers to connect multiple nodes and thus discover the origin of a transaction.
- Using Personal Identity
If a Bitcoin owner uses their personal identity in a Bitcoin transaction, this can also result in a loss of anonymity. For example, a delivery address for something ordered in an online store could connect the buyer’s name and home address to their Bitcoin. If any of the input addresses in the aforementioned Bitcoin transaction are tied to the buyer’s identity, all of the other addresses will be as well.
- The Transaction Ledger
Bitcoin transactions are open to all, which means that addresses can be traced. This allows for a group of different Bitcoin addresses to be tied to a particular user. If just one address is tied to an individual’s identity then the others in that group can also be tied to their identity.
How to Enhance Bitcoin Anonymity
- Use More than One Wallet
Having multiple wallets can be compared to having several identities. There is a software that Bitcoin owners can use to control several wallets from the same interface (we will come back to that in a later guide).
- Use One of the Mixing Services
Mixing services blend users’ Bitcoins together. They send them out randomly to make it impossible to figure out the connections between inputs and outputs. While this works, it also requires Bitcoin owners to place a significant amount of trust in the mixing service. There is nothing to stop them from recording the transactions or absconding with all the Bitcoin.
- Use Online Wallets
Since these services store all the Bitcoin that has been entrusted to them together, it is possible to hide the original owners. This can only work if the wallet service is active. There is also a risk for losing the Bitcoins if the service shuts down or gets hacked.
As Bitcoin evolves, it is expected that there will be upgrades to improve anonymity. These upgrades include ways to keep addresses from being connected during a transaction. Researchers are also working on methods of combining random transactions as a means of enhancing privacy.
Fidelity Investments is Mining Cryptocurrency
Fidelity Investments is a multi-billion dollar brokerage that just so happens to be mining cryptocurrency. In fact, it has been at it for three years, using its own computers to harvest bitcoin and Ethereum.
CEO Abby Johnson recently told Fortune that its U.S.-based mining operation is “making a lot of money.” This comes despite running a relatively modest operation.
Hadley Stern, Senior VP of Fidelity Labs, described his company’s venture as an “experiment.”
The real reason we began mining, and still do, is to learn how the network works, how consensus works, how difficulty levels work,” he said in reference to the mining process.
The key to profitability has been the dramatic rise in cryptocurrency over the past year. Bitcoin and Ethereum are the world’s No. 1 and 2 cryptocurrencies by market capitalization, and no-one else comes close.
Well Ahead of the Pack
The fact that Fidelity has been at this for three years speaks volumes about the company. Other, much bigger players are still dipping their toes in the market, but are unsure about how to proceed. Goldman Sachs is reportedly on the fence about starting a cryptocurrency trading operation, while J.P. Morgan has already begun handling customer orders for bitcoin-based instruments.
Fidelity is doing a lot more than just mining tokens. Earlier this year, it reached an agreement with Coinbase to let customers view cryptocurrency prices alongside other assets on their Fidelity homepage.
Coinbase is the world’s most funded cryptocurrency exchange with more than 7.4 million users.
The cryptocurrency market ended the week on a firm note, with bitcoin (BTC/USD) reaching a session high of $4,425.00. At press time, the index was up 1.6% at $4,368.
Ether is also trading higher against the dollar, with the ETH/USD rallying more than 3% to $305.
Ripple (XRP) lost momentum on Friday, but still managed a weekly gain of 21%.
Chinese Government Eyeing Fresh Bitcoin Legislation?
The Chinese government could roll out fresh cryptocurrency regulation in the coming months permitting licensed brokers to operate, based on recent information from Xinhua.
The state-owned news publication recently revealed that the government is mostly concerned with stamping out illegal activity involving bitcoin and other cryptos. Government authorities could be planning to regulate the market by creating a licensing program with strict Know Your Customer (KYC) and Anti-Money Laundering (AML) systems.
The Case for AML
The need for KYC/AML protocols has long been raised by cryptocurrency proponents, especially in reference to initial coin offerings (ICOs). In response, the blockchain community has come together to create the Simple Agreement for Future Tokens (SAFT). The SAFT is both an instrument and open-source framework for token sales that vets accredited investors.
SAFT activity is quickly gaining traction, with the likes of Gizer recently issuing a presale of its ICO through SAFTLaunch.
SAFT was officially created by Protocol Labs in close collaboration with AngelList and Cooley.
China’s Stance Looms Large for Cryptocurrency Market
Although digital assets have recovered from the China-induced flash crash of September, favorable regulations on the mainland could mean big business for bitcoin exchanges. Prior to the ban on ICOs and bitcoin brokers, Chinese investors were responsible for a quarter of all BTC trades.
According to Xinhua, China is likely to pursue a licensing program similar to Japan, a country that recently approved 11 cryptocurrency exchanges. CnLedger, a leading source of cryptocurrency news in China, recently had this to say:
“Xinhua News, official press agency of CN: Virtual currencies have become the top choices of underground economies. We shall adopt ‘0-tolerance policies’ towards crimes hidden underneath and take measures such as record-keeping, licensing, AML processes, real-name, limiting large transactions.”
Is China’s cryptocurrency ban temporary? It certainly looks that way. Regulators must already know that the ban hasn’t stopped mainland investors from buying cryptocurrencies next door in Hong Kong or Singapore. A saner approach to an all-out blanket ban is a tighter regulatory framework that will stamp out money laundering and other underground activities.
«Featured image from Shutterstock.»
Tim Draper Has Made Over $110 Million Since 2014 With his Bitcoin Investment
Tim Draper, the billionaire technology investor and prominent venture capitalist who has invested in some of the most successful technology startups in the likes of Coinbase, Patreon, SpaceX, Tesla, Box, FourSquare, has profited over $110 million from his investment in bitcoin less than three years ago.
In 2014, Draper participated in the auction of 144,336 bitcoins by the US government and the US Justice Department, which were seized during the investigation into Silk Road, a dark web marketplace. Draper was granted the permission to purchase a batch of 30,000 at around $600 from the US government.
Upon securing 30,000 bitcoins, Draper told Fox Business:
“[I’m] very excited about bitcoin and what it can do for the world. Bitcoin is as big a transformation to the finance and commerce industry as the internet was for information and communications. If bitcoin were here in 2008, it would be a stability source for our world economy. Everybody should go out there and buy a bitcoin. Every investor who’s a fiduciary should at least be partially involved in bitcoin because it’s a hedge against all the other currencies. There’s a whole ecosystem being built that’s going to make commerce much easier with much less friction and safer.”
Today, Draper’s 30,000 bitcoins are worth $129.9 million. Considering that Draper had spent $19 million purchasing the batch of 30,000 bitcoins in 2014, Draper has recorded a profit of over $110 million in less than three years.
While Draper held onto his investment in bitcoin, the US Justice Department was quick all of the 144,336 bitcoins seized during the Silk Road operation. According to various sources, the US government sold the majority of its 144,336 bitcoins at a price of $336, at $48 million. If the US government had sold its bitcoins in 2017, it would have generated an additional profit of around $573 million, as 144,336 bitcoins at today’s bitcoin price of $4,330 are worth $624.9 million.
Since 2014, in addition to purchasing tens of thousands of bitcoins, Draper has funded some of the most successful bitcoin companies in the cryptocurrency market including Coinbase and Korbit. Earlier this year, Coinbase secured a $100 million investment at a $1.6 billion valuation, while Korbit was acquired by the parent company of a $10 billion gaming company in Nexon at a $140 million valuation.
Furthermore, Draper has not sold his stake in Coinbase and earlier this year, Brian Armstrong, the CEO of Coinbase, revealed that Coinbase is still at an early stage in terms of developing and scaling. Armstrong noted that it will evolve into the safest and most trusted exchange in the global market.
“Digital currencies are having their ‘Netscape’ moment. The pace of innovation has been accelerating and we are now seeing exciting projects and companies being built on top of digital currencies. We’re beginning to transition into phase three of our secret master plan. Our goal is to be the safest, most trusted and compliant, and easiest to use. Not the first to market with new assets. Especially at scale, it takes time to ensure any new asset we add is well tested and secure,” said Armstrong.
Coinbase is also one of the two exchanges in the US market apart from Gemini that is targeting institutional and retail investors by providing sufficient liquidity. As Coinbase and its flagship cryptocurrency trading platform GDAX continue evolve, Draper will position himself at the forefront of cryptocurrency innovation and disruption.
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