Bitcoin is a digital currency or an online payment system which was introduced as open-source software in 2009. The transactions are facilitated with mo middle man which means, there is no banks involved in the entire transaction. Many are using this digital currency and they are enjoying the benefits of using bitcoins. There are no additional transaction fees and all transactions are made under a pseudonym.
Understanding the Anonymity
You are not required to include your real name in every bitcoin transaction since you will be authorizing the transaction under a pseudonym. You may then conclude that it is an anonymous payment system. You are wrong because the transaction is not completely anonymous. However, there are certain privacy settings you can use to protect your privacy. The key is to use it correctly.
In Bitcoin, the address you use to receive the payment will be your pseudonym. If the address is linked to your identity, then all transaction will be linked to you. All bitcoin transaction is stored in the blockchain permanently. The blockchain is a public ledger which is distributed to all machines connected to the system. The information will be there forever and editing is impossible.
Publishing your bitcoin address on public spaces such as website and social networking sites is a bad idea if you want to increase your privacy. Once you do this, all the transactions will be permanently written in your public address. Posting a bitcoin address on public spaces is only advisable if you are accepting payments or donations to establish transparency.
Within few seconds you can make an instant bitcoin transaction and you can get the confirmation within 10 minutes. While waiting for the confirmation, the transaction is considered to be authentic but it is still reversible. For expert dishonest users, cheating is very possible. The confirmation decreases the possibility of reversed transaction. To increase security in the transaction, you can ask for a minimal transaction fee or use a detection system to detect unsafe bitcoin transaction.
New Address for Every Transaction
The most effective practice to protect your identity is to use different address for every transaction. Always change your address when you send or receive payments. With this, linking the transactions to a common owner is difficult. It is like writing several books under different owner. However, this cannot guarantee full anonymity.
Maintaining multiple identities can increase your anonymity when using bitcoin. The fastest way to do this is to use multiple wallets. It is possible through MultiBit, a lightweight and easy-to-use software wallet for Windows, Linux and MacOS. Managing multiple wallets is very possible by just using one program.
Another way to protect your identity is to use mixing services. The mixing service allows you to trade your bitcoins to another user that has a different history. The process is very easy. Put your bitcoins in a big pot and let the other bitcoin users take yours. They will send back the bitcoins randomly and then, tracing which inputs connect to which outputs is difficult.
Using mixing services require complete trust to anonymous user. You need to trust the use to send back your bitcoins and not to keep your transaction history. Mixing services can slightly break traceability and yet, this technique is not advisable for transactions that involve large amount of bitcoin.
Generally, bitcoin is still experimental. It is still an active development. This online payment system does not guarantee full anonymity. There are still many improvements that the system needs to improve identity protection. Yet, to increase privacy, you can use several techniques but remember that some of the techniques are not applicable for larger transactions.