How Anonymous Are Bitcoin and Bitcoin Wallets?

Bitcoin is often described as a way to transact anonymously. But just how anonymous is it?

First off, it is useful to draw a basic distinction between anonymity and privacy in the context of financial transactions. We will call a transaction “anonymous” if no one knows who you are. We will call a transaction “private” if what you purchased, and for what amount, are unknown.

How anonymous is bitcoin today? Average users should be aware that it is certainly less anonymous than cash. Meanwhile, dedicated users willing to go through extraordinary lengths can find ways to acquire and use bitcoin anonymously, but the open nature of the transaction ledger and other unknowns leave open the possibility that identities and activities once considered perfectly secure may be revealed at some point down the road.

What about the future? As bitcoin adoption continues to increase, it is not out of the question that a technology arms race could arise between anonymizers and deanonymizers: on the one hand, increasingly sophisticated data mining schemes will be developed, possibly combining transaction graph analysis with IP address discovery, to trace the movement of funds in the block chain between individuals and across borders. On the other, improved techniques will be devised to better conceal individual identity and activity.

Here there are many unknowns. Will the core bitcoin code be modified to further protect anonymity or to facilitate regulation? Will bitcoin mixing services become pervasive and secure? Will transaction graph analysis reach a degree of sophistication where most user activities can be easily traced? Will an alternative digital currency or side chain arise which tilts the balance for or against anonymity? All we can say with certainty is that bitcoin is still in its infancy and that existing thinking and tools in the area of anonymity are still primitive. We have seen only the opening moves; the endgame has yet to be played.