How to Use Bitcoin Anonymously

By now, you must have heard of Bitcoin, the preferred currency of the digital frontier. It is a wonderful tool that should be part of any internationalization program, but it has to be used correctly to get its full benefits.

  • Bitcoin is digital cash. You do not get a Bitcoin account, you get a Bitcoin wallet. Holding Bitcoin on a computer is the same as holding government money in your wallet.
  • Bitcoin is distributed. There is no central office and no central computer… anywhere. There is no carefully managed issuer of Bitcoin – it is issued by a large number of "miners," few of whom even know each other, according to a computer program that was written several years ago.
  • Bitcoin can't be printed up like national currencies. Bitcoin has to be 'mined,' and this requires special computers, lots of calculations, electricity, and a bit of luck. It's neither free nor easy.
  • Bitcoin is limited. Only 21 million bitcoins can ever exist, and they can only be mined according to preset rules. (About 11 million exist now.)
  • Bitcoins are divisible to eight decimal places (0.00000001 BTC), ensuring that even the smallest transactions aren't a problem – even if Bitcoin were to go to a value of US$10,000 or beyond.
  • Bitcoin can't be changed. It is a widely distributed computer program and cannot be changed by any single party. In order to change the program, you'd have to alter it on thousands or millions of computers at once; you could not just hack one central computer and gum up the works.
  • Bitcoin is open source. It is a specific set of rules cast into a computer program that can be checked by anyone to assure that there are no secret back doors (tracking mechanisms or otherwise).
  • Bitcoin is pseudonymous. Every transaction is recorded, but real names are not. While Bitcoin is not properly anonymous, it can be used anonymously if you do simple things like never using the same address twice. (We cover exactly how to do that below.)
  • Bitcoins are oblivious to borders, laws, or rules. This is simply computer code – nothing else matters to it.

This last point is probably of most interest to readers of InternationalMan.com. Bitcoin makes it easy to move funds around the world and convert it into and out of fiat currencies in a very private fashion.

There's nothing to declare at borders, as with cash or precious metals, since the value exists "out there" in the Internet. All you have are the keys to access those funds when desired.

And, best of all, it allows frequent travelers and permanent travelers (PTs) to build up a readily accessible "emergency account" that can't be easily identified, let alone stolen.

However, the trick to getting all these privacy benefits is to use it properly. That starts by realizing…

Bitcoin Isn't Naturally Anonymous

Bitcoin is often called an anonymous digital currency, but this is not correct – it only provides strong anonymity when used properly.

The reality is that Bitcoin transactions are not private; in fact they are very public. Due to the way Bitcoin's decentralized ledger works (the blockchain), all transaction history is recorded and is available to anyone on the Bitcoin network. This is a bit like posting your bank statements online.

However, there is no reason that you have to put your name on that statement. In fact you can have many statements all with different names, and you can effectively swap statements with other Bitcoin users. Doing this makes it effectively impossible to connect you to your transactions.

And by doing so, your use of Bitcoin can be made, for all intents and purposes, anonymous.

How to Use Bitcoin Anonymously

First, it is good practice to use multiple Bitcoin addresses (the way in which bitcoins can be sent back and forth – they look like this: 1LCrzrJscnzHCsEd5gNaCJ4X8gqWanTnM2). Whenever you are going to enter into a transaction with a new person or group, generate a new address for that person. Generating new addresses for new transactions will help to obscure the transaction history.

As mentioned above, the way to remain truly anonymous is to avoid ever connecting your name to any of your Bitcoin addresses. For example, if you put your name next to a Bitcoin address on a website, and accept payment/donations at that address, the bitcoins accepted will be linked to your name. If you then use the coins stored at that address to purchase some socks from Grass Hill Alpacas, anyone in the world with an Internet connection and an interest would know that you are walking around in alpaca socks.

It is not always possible to separate your name from your Bitcoin address, particularly if you use a purchase method that requires ID. The solution for these situations is a mixing service.

While it's beyond the scope of this article to spend too much time on this, it's good to know that, even if you use a service that does track your Bitcoin use to your name, you can achieve a strong level of privacy simply by using something called a "mixing" service.

As the name suggests these services 'mix' your coins with other users' coins. By doing so, it breaks the chain between your name and the coins held in your wallet.

There are a variety of services that offer this, one of the largest being called BitLaundry.

Definitely a good way to restore privacy if you find yourself in an "unprivate" situation.

Private Exchanging

An increasingly common way to buy and sell bitcoins is called over the counter exchanging, or simply OTC. In an OTC exchange, you first communicate with a local exchanger to set the amounts and fees, and then meet at a safe place and exchange cash and bitcoins.

By custom, cash is kept in an envelope and stays on the table until the Bitcoin transfer is complete (you obviously must bring your laptop or smartphone with you). After the transaction is complete, the two of you depart separately.

There are minor risks associated with OTC exchanging, such as being robbed afterward. This is very rarely a real problem, since:

  • The sellers are publicly rated by their clients and strive to maintain their high ratings.
  • Transactions take place in safe, public locations, generally during the day. (It's awfully hard to get away with a strong-arm robbery in a Starbucks.)

Fees for OTC exchanges generally run in the 5% range, but they can vary. These exchanges are immediate and there are no hoops to jump through. They are also effectively anonymous.

You and your local exchanger will probably want to start with lower amounts until you develop some trust between you, but after that, the amounts are strictly up to the two of you.

The two most common online forums for OTC transactions are bitcoin-otc.com or localbitcoins.com. You can also search for people buying and selling Bitcoins for cash or barter on craigslist.

How to Stop Leaving Your Identity Behind

Your computer's IP address may as well be your national identity card – it reveals the same information about you. Make no mistake, everything you do on your computer (and smartphone) can be easily tracked back to you thanks to your IP address.

That's why, if you wish to use Bitcoin anonymously, your IP address should not connect to your Bitcoin addresses at any point.

Here's how to do it:

To protect your IP address for free, you need to get one or more security programs and use them religiously. Those programs are: Tor, I2P, GPG (Windows version), Pidgin, OTR, and Mac Changer for mobile computing.

The Tor network is widely used, but be warned: It is also very slow.

In addition, you should encrypt your hard disk with TrueCrypt and throw away all the apps on your smart phone. (Save, perhaps, your Bitcoin app.)

It is easier to use a virtual private network (VPN) for security, but be very sure that it is a good one. Do not just buy the cheapest one – they are not all equal. A good VPN should have:

  • Multiple hops
  • Out-of-band authentication
  • No single point of failure (Separation of operations)
  • Their own DNS system
  • Customer service

Regardless of which route you take, take it seriously. Also, get and read this guide to online privacy.

Right now, some Bitcoin services are moving to the Tor network to avoid attacks. To reach them, you'll have to use the Tor browser (link above). However, do not use the Tor browser only – it is enough to get you to Tor sites, but not enough to protect your privacy sufficiently. Either use Tor with the other free steps mentioned above, or with a good VPN like Cryptohippie.

[Full disclosure: I am a co-founder and current manager of the Cryptohippie service.]

So…

If you use Bitcoin carefully, it is a wonderful tool for transferring value, world-wide and privately. It is a phenomenal resource for active and would-be internationalists looking for ways to move funds around without the usual difficulties.

Overall, Bitcoin is a terribly important new tool, but it is also a frontier technology. Start slowly, learn everything you can, and limit your risk with small transactions until you know how to use it well.

But once you do, you'll find it to be a very valuable indeed – both domestically and in the international world as well.

Good luck!


Paul Rosenberg is the "outside the Matrix" author of FreemansPerspective.com, a site dedicated to economic freedom (including alternative currencies), personal independence, and privacy. Visit our website to read more insightful articles like this.

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