Using cryptocurrencies such as Bitcoin and Ethereum has been shown to have limitations in terms of privacy. A stranger csould link your coins to your identity and use such information for bad purposes because the blockchain is an open ledger which anyone that has its copy sees every transaction and address balances. So a wallet with large volume of coins we be a prime target for such strangers.
Pseudo-anonymous Digital Currencies
This is why Bitcoin and Ethereum networks are theoretically anonymous but practically
pseudonymous. What this means is that a wallet address and strings of numbers may
not make sense in relation to identifying their owners. But in reality, a wallet could be
linked to an IP address through an effective blockchain analysis. The wallet could also
be associated with another linked to a KYC’d account in an exchange. Also you leave your credentials on the websites while spending crypto and purchasing goods. This means that the identity of the owner is no longer private. Database leaks happens all the time.
These are some of the privacy challenges faced by users of Bitcoin and Ethereum, especially at a time data is big business. Among the solutions proffered to crypto
enthusiasts who are privacy conscious is peer-to-peer transaction which may not entail submitting id to an exchange, but in recent weeks, we have seen some of the prominent peer-to-peer platforms move towards compliance with laws demanding that users submit to identity verification processes.
More KYCs Expose User Identity
We saw this when Localbitcoins announced that users would now be subjected to KYC
procedures. Consequently, the platform which is one of the largest peer-to-peer Bitcoin exchanges initiated total verification process before users can access its services. With the options for anonymous use of Bitcoin and Ethereum limited.
Person To Person Transaction Setbacks
People may be forced to resort to person to person contact to trade Bitcoin as seen in
places like India where the government has placed restrictions on exchanges. However,
even that does not ensure the privacy of the user. There is also the risk of criminal hijack
of wallets or other violent crimes against the owner to steal their assets.
Furthermore, person to person transaction of cryptocurrency does not make the owner anonymous, since the other party would positively identify the person with which they made the transaction.
This is why Bitcoin and Ethereum mixers have become the platforms of choice in maintaining the anonymity of coin hodlers. Tumbling services such as Bitcoinmix.org
adds an extra layer of privacy while spending these cryptocurrencies. The hodler could accomplish this by using the mixing service to obfuscate their own wallet addresses before sending the coin to designated wallet.