The Truth About Bitcoin Privacy: Why Your Crypto Activity Isn’t Secret

Quick Links

• Public Blockchains Aren’t Private
• Public Blockchains Are Built to Be Transparent
• Transparency Is a Core Value of the Web3 Community
• Anonymity vs. Privacy
• Broadcasting Your Financial Activity

One of the biggest misconceptions about cryptocurrency is that it is private. The Bitcoin network, like many of the major blockchains that are popular, is a public distributed ledger, which means everyone can see what’s happening on the network.

Public Blockchains Aren’t Private

Public distributed ledger technology is basically a giant transaction history of all the economic activity on a given blockchain that is out in the open for all to see and use at their discretion.

Imagine if a major bank like JP Morgan or Wells Fargo published all the transactions happening across all of their accounts for everyone to see who cared to look—and made access to look free to anyone around the entire world. That might upset a few people and seem radical, but that’s pretty much what’s happening on public blockchain networks like Bitcoin and Ethereum . It’s an experiment in radical transparency and some consider it a feature of this technology, not a disadvantage.

Pop culture and some government officials use cryptocurrency as a stand-in for secrecy in financial dealings, but this is a misunderstanding of how this technology is being used. Let’s explore the nuances of anonymity versus privacy as it relates to cryptocurrency networks like Bitcoin and Ethereum.

Public Blockchains Are Built to Be Transparent

Blockchains as used in cryptocurrency are public distributed ledger technology. You can imagine a massive database keeping track of all the credits and debits happening on the network. It’s called a blockchain because each set of transactions is collected into a block.

Those transactions need to be validated through a trust layer to ensure they are accurate and there’s no fraud or corruption. This is done using a consensus mechanism that audits the accuracy of the transactions moving through the system. If all the transactions are validated, then the block is added to the chain and becomes part of the data encapsulated on the network.

Since one of the central objectives of blockchains is to offer trust, the entire chain is made public for all to see, audit, and verify the accuracy of the blockchain. This means anyone and everyone has the ability to see the state of the blockchain.

Related: How to See How Much Money Has Been Sent to a Bitcoin Address

One way to observe the activity on a given blockchain network is touse that network’s block explorer . For example, on Ethereum, the block explorer most used is Etherscan.io . You could think of it as a giant Google search engine for all the data on the blockchain network, containing each transaction ID and all of its metadata as well.

Transparency Is a Core Value of the Web3 Community

One of the values of the crypto community is that anyone should be able to verify the activity on the chain. Because there is no one central authority that is deciding what is true and accurate, this trust is derived from the community of miners or validators checking the chain using a specified mechanism for achieving consensus.

As transparency was built into the architecture of the public blockchains like Bitcoin and Ethereum that we use today, the data on them is completely open and available to the entire world to do with it as they chose.

There is no governing body over how and for what purposes this data can be used. Furthermore, this massive amount of data is a source for many business models which make their living from analyzing the data for particular use cases and ends.

Anonymity vs. Privacy

While some degree of anonymity may be possible , however, privacy is not. An unknown wallet address may be observed in the public. Over time, based on transaction history, some skilled users may be able to decipher who owns an anonymous wallet or at least make educated guesses. There is an entire industry based on blockchain forensics to study exactly this subject. This further illustrates that lack of privacy when using public blockchain networks.

Developers are working to make more privacy solutions available, and alternatively, you could transact on a private blockchain, which is often what big corporations and enterprises use for their internal business processes.

However, many privacy solutions are not adequate. There needs to be more work done in this arena. Also, many governments do not wish to see privacy solutions that could be used to circumvent regulations that they want to enact on digital assets and cryptocurrency.

Broadcasting Your Financial Activity

It’s important to understand that your blockchain activity is not private, and transacting on public blockchains is essentially broadcasting your financial activity to the internet. Transparency is part of the ethos of the crypto community and is reflected in the way blockchains are designed and verified.

Note that there’s a difference between anonymity and privacy, and you can have an anonymous wallet with transaction data publicly available. Attempts to improve privacy are in the works but are not adequate at this time. It’s crucial to be aware of this when transacting with cryptocurrency.