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Are cryptocurrency wallets anonymous?

Anonymity is a big draw in the world of cryptocurrency, but not many people understand how anonymous cryptocurrency wallets are nor how to better protect themselves from information leaks. Find out more in this guide.

If you’re new to the space of cryptocurrency, it’s possible you have heard that tokens like Bitcoin are ‘anonymous.’ This is only true to an extent. In fact, Bitcoin is ‘pseudo-anonymous.’

This is because cryptocurrency relies on blockchain technology, which prides itself on being entirely transparent. Therefore, any transactions that occur for a cryptocurrency will ultimately appear on that token’s blockchain. There is no identifying information used on the blockchain, however. So, to an extent, you can be anonymous – hence the term pseudo-anonymous.

However, if you do not take proper precaution in protecting your identity, it is possible for a hacker to trace a transaction back to you. For example, users in the Bitcoin network will be given a public address through which they can receive Bitcoin. The blockchain will have records of that address being used to engage in buying and selling Bitcoin, so if a hacker is easily able to follow that address back to you, your pseudo-anonymity is lost.

It is a common misconception that Bitcoin is anonymous for these very reasons. If you endeavour to take precaution seriously, you shouldn’t run into an issue of being exposed. For the most part, and providing you do not rush into trading with cryptocurrency, you should be able to retain your pseudo-anonymity with the right precautions. One big piece of advice, that should seem obvious, is to enable two-factor authentication wherever possible on your accounts.

How can you add extra security?

Another method that can drastically improve your security is using a multi-use wallet. This is a wallet that generates a fresh public address each time you make a transaction. If you do this, every transaction of yours on the blockchain will appear as though it has been made by a different person. It becomes significantly harder to follow the thread of transactions if there is no singular address to trace.

Also, if you haven’t heard of a Virtual Private Network (VPN), now would be the time to look into them. A VPN enables users to securely access a private network and share data remotely through a public network. They can also mask your IP address, with the VPN giving you a new IP from a list of available options. For example, if you were based in the UK, you could use an IP from the other side of the world and make it look like your computer is located in this other country. VPNs function by encrypting all inbound and outbound data so that they remain secure. However, be careful with a VPN: they can be compromised.

So how can you be anonymous?

Whilst Bitcoin is pseudo-anonymous, there are other tokens on the market that focus on privacy. Two big examples are Monero and Zcash. Monero cryptographically hides the number of tokens that a user owns or trades with. Furthermore, they guarantee a degree of fungibility by ensuring that all the coins are of the same value, meaning they are mutually interchangeable. To help maintain decentralisation, all the nodes in the network are equal in power and control, so there is no singular entity creating the currency.

Monero’s protocol allows users to receive payments through a singular address. However, the blockchain functions in a way that the user’s address and other people’s addresses are not linked together. To achieve this, ‘stealth addresses’ are used, where the network generates a randomised, one-time address for a given transaction. Consequently, transactions sent to the user all have a unique address on the Monero network, making it much more difficult to trace a number of transactions back to a single user.

Ring Signatures are another method that Monero employs to help boost anonymity. If a user who has received funds wishes to move them, a Ring Signature will mask all the outputs on the blockchain making them untraceable to the original sender. Whilst Monero is one of the more well-known cryptocurrencies that focuses on privacy, there have been reports suggesting that Monero isn’t as private as it was previously thought to be.

Zcash is another leader in regards to privacy in the cryptocurrency world, though it is reported to take up to 40 seconds and 3GB of RAM to anonymise a Zcash transaction, so you’ll need a powerful computer. Zcash makes use of their custom-built ‘zero-knowledge proof’ technology dubbed ‘zk-SNARK’, which helps users protect their privacy and checks through the network to see if anybody is cheating or stealing.

There is a lingering question mark over privacy coins though, particularly when considering exchanges. Many people question whether or not you can truly remain anonymous when using one. There is not a concrete answer to this question yet, however.

These two examples of privacy-driven tokens are by no means all that there is on the market. Just remember, if you’re looking to truly ensure your anonymity, do your own research and be sure that you are happy with your decisions. However, if you are not interested in the likes of Monero or Zcash, ensure that you take the adequate steps in protecting your cryptocurrency wallet, private keys, and accounts.

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