How to Acquire, Hold and Spend Cryptocurrencies Anonymously in 2021
A lot has changed since 2009, when Bitcoin launched.
One of the main selling points of cryptocurrencies like Bitcoin has always been the assumed ability to afford users privacy on the Internet. Before 2009, there was no way to send and receive money over the Internet without sharing personally identifying information such as a name or address.
While privacy remains a strength of crypto, the technical capacity of third parties to spy on your activities has increased over time. Today, there are many ways that others can force you to disclose who you are as you use crypto or determine that by collecting data.
Companies like Chainalysis have been set up to collect data on crypto usage and share it with government agencies and other entities. They seem to be successful at it. Chainalysis, for example, has raised close to $300 million in capital funding and is now valued at close to $2 billion.
The collection of data about crypto usage is in particular possible because the transactions are recorded on ledgers that are publicly accessible. Even though you acquire a new identity (public address) on the shared ledger, it can now be connected to your real-world identity using special tools.
Also, many of the services you need to use to transact cryptocurrency are increasingly demanding that you provide and verify your identity. This is due to laws and regulations being enacted and enforced in many jurisdictions around the world.
For example, to use an exchange like Coinbase to buy bitcoins, you must provide a government-issued identification document. The company might share this information with others, such as the tax collector.
So what can you do to protect your privacy?
Innovations are coming into the crypto space to help with that. One of those is the rise of private coins. These are cryptocurrencies designed to obfuscate transactions. Even though a transaction is recorded on a public ledger, a third party cannot tell the participants and how much is involved.
Some of the private cryptocurrencies being used today include Monero, ZCash, and DASH.
However, while these cryptocurrencies offer high levels of privacy, they have not been embraced by many. That means to have meaningful use of cryptocurrencies, you may have to use the more popular ones. That also means you have to take extra steps to preserve your privacy.
If you are keen and effective, you can remain completely anonymous while using Bitcoin, Ethereum, and other similar coins. And that is despite the aggressive efforts of those who want to see everything you are doing with your money online.
You need to take care of three parts of the crypto transactions to protect your privacy: acquiring, holding, and spending.
You can easily blow your cover at the point of acquiring cryptocurrencies. That can be when buying, mining, or trading for profit.
Buying is the most common way to acquire cryptocurrencies. However, buying crypto anonymously is becoming difficult as regulators around the world are demanding that exchanges and trading platforms observe the Know Your Customer (KYC) regulations.
For example, you have to provide an ID document to buy bitcoins on Coinbase, Bitstamp, or Binance. You also might be expected to share an image of yourself and provide a verifiable physical address.
A while back, you could buy crypto on peer-to-peer exchanges like Localbitcoins and Paxful without disclosing your real-world identity. Since the platforms simply match you with other traders, it did not seem necessary for users to identify themselves, particularly the platform admins. That is no longer the case, especially if you want to buy or sell substantial amounts of crypto.
Nevertheless, you can still use these exchanges with some level of anonymity as long as you don't cross particular thresholds. For example, you can trade up to €1000 on Localbitcoin without providing and verifying an ID, but you are expected to fill a form with your full name, email address, and phone number.
Fortunately, there is a more private category of exchanges you can use. These exchanges never ask for even your name or an email address. They are known as decentralized exchanges (DEX).
A decentralized exchange is a platform on top of the blockchain and is not managed by anyone. Its operations are executed through a smart contract. A DEX is independent of human control, except for a community of users who act through consensus. Therefore, it cannot be stopped or forced to abide by particular regulations. That is why they can afford not to ask for any ID.
Examples of DEXes where you can buy crypto and don't have to share any personally identifying information include Uswap, Pancakeswap, and Sushiswap.
The main challenge with using DEXes is that the only assets you can buy and sell on most of them are limited to those on a particular blockchain. For example, you can only buy and sell Ethereum assets on Uniswap. The only way you can buy Bitcoin on Uniswap is through a token on Ethereum that represents it known as Wrapped Bitcoin (wBTC).
Other blockchains that have decentralized exchanges include Binance Chain, Solana, and Polkadot.
Using a crypto ATM is another way to overcome privacy challenges when acquiring cryptocurrencies. This is a machine placed in a strategic location, and you can feed it dollar bills and provide an address, and it delivers an equivalent amount of cryptocurrencies based on the reigning market rates.
The challenge, though, with using crypto ATMs is that there are not many of them around. Also, most operators have begun asking for ID, especially if you are transacting significant amounts.
You can use this map to find a crypto ATM near you.
Besides buying on decentralized exchanges and using ATMs, you can acquire cryptocurrencies without disclosing your identity by mining or staking. That means providing computer resources to a blockchain network or locking your digital assets to help maintain its shared ledger. In return, you receive a reward in the form of newly released coins and the fees people pay to use the network.
Another way to acquire cryptocurrencies without disclosing your identity is to become a liquidity provider (automated market maker) on decentralized exchanges. By making funds available to be exchanged or lent out, you earn interests and fees. This way of growing your value is also known as Yield Farming.
The type of wallet you use to keep your crypto can affect your privacy. Some wallets are more private and secure than others.
If you use a mobile wallet by a centralized exchange or any other entity, you are likely to be expected to provide personally-identifying information. For example, Coinbase has a wallet you can download and use on your smartphone. However, it is connected to your account on their platform, and to use it, you must identify yourself.
You are likely to be more private if you use open-source community wallets. For example, if you download a network node on your desktop, you have more control over the wallet that comes with it. This is because there is no company trying to meet the demands of a regulator by collecting data.
Meanwhile, mostly offline wallets (cold wallets) are more private than those constantly online (hot wallets). And that is because the latter can be remotely monitored, and if enough data is collected, your identity and your activities can be known by others.
Also, you are more in control of a hardware wallet than a wallet that an exchange gives you. A hardware wallet is an electronic device that protects your crypto wallet’s digital signatures from leaking to the internet.
You should also adopt the practice of providing a new address for every payment you receive. Using the same address repeatedly to receive payments makes it easy for those observing the public ledger to determine your identity.
Just like when acquiring and holding crypto, how you spend it can risk or strengthen your privacy. That starts with the type of wallet you are using to spend your crypto.
Generally, open-source community wallets are better than those built by corporate entities. And like in the holding part, you are better of using a hardware wallet to send your cryptos.
When making payments, also try to use mixer and tumbler services. This is a platform that takes your transaction and obfuscates it with those by others to make it harder for anyone tracking it to tell where payment is coming from and where it is going.
Also, always ask for a new address for every payment, even when making regular payments to the same person, service provider, or merchant. The protocols that run cryptocurrencies are designed to generate as many addresses as needed; it is not like a bank that can only give you a number that you have to use over and over again.
Using the same address several times makes it easy for companies like Chainalysis to discover your identity and record your activities.
If you make these steps part of your using cryptocurrencies habits, you can significantly reduce the possibility of third parties knowing what you are up to with your money.