Privacy is important in financial transactions. Using Bitcoin does not require any personal information. This is achieved by using only randomly generated public addresses as identification. However, every transaction from one address to another is public, so there is a certain amount of good practices needed to adopt in order to protect your privacy.
Using addresses only once
Common good practice is to use each address only once. This means that new address should be generated each time you are willing to receive payment. There is a huge number of possible addresses so there is no need to worry of ever running out of them.
Another way to make it more difficult to trace transactions is to send random amounts of currency from one address to another on random intervals. This way it is harder to predict if the currency is still in original owner's possession. There are also services that will do this for you or exchange bitcoins with other addresses with different history. Simply sending your coins to another persons new address and in return receiving the same amount back to your new address or multiple of them is making these transactions harder to track.
Using services that let you hold your coins on a joint address with multiple users gives you another level of privacy. This method, as previous, requires trust in the service that it will not only return you the money, but also not store the information from which address it initially received the coins from.
Bitcoin is a decentralised peer-to-peer network, which means that users connect to each other directly in order to communicate. This means that your IP address is known to the peers you are connected to and anyone that they share that data with. This could enable an IP address to be associated with a Bitcoin address that made a new transaction. Since IP addresses could be associated with people using them, this could expose an identity of an owner of the address. Full node clients will resend your transactions same as they would their own which makes it harder to determine where the transaction originated from. However, it is still possible to determine which IP address it originated form first, if enough of the peers is owned by same party or are sharing such data. In order to preserve privacy of an IP address, it is a good practice to use a trusted VPN service that does not keep records, and/ or it is possible to use software like Tor, that makes it a lot harder to determine IP address of the client connected to the network.
Mixing services (also called laundries and tumblers)
are used to exchange a set of bitcoins which are perceived to be tainted for another set which are believed to be taint free, for a small fee. This is done in an attempt to stop investigators from being able to follow the block chain and determine current ownership of bitcoins that they have a specific interest in.
- SharedCoin (blockchain.info's mixing service)
- joinmarket.io Start Here / What is JoinMarket ?
- CoinJoin is a mixing technology
- Jumblr Nxt's dev jl777's new service needs testing.
Altcoins designed for privacy
- Moneta "The vision of the Moneta Project is to create a next-generation sidechain, which makes breakthrough improvements to supplement Bitcoin. "