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Down the Bitcoin Rabbit Hole: Is the Currency Truly Anonymous?

Researchers have asked a very important question about the bitcoin, a question that has spurred the unregulated currency’s popularity, as well as its controversy: is bitcoin anonymous, or can it be tracked?

The conclusion they found: yes.

One of the major reasons why this has become such an important question in recent months is because of how many comparatively large thefts have taken place.  Also, with the bitcoin valuing at around $400 as of Nov 13, thieves will be on the prowl for bitcoin wallets to lighten.

However, one theft that sparked national attention from the media, and even spurred academic level research happened in the summer of 2011.  25,000 bitcoins were stolen from an encrypted wallet.  As of today, the thief is now the proud owner of roughly $10 million in ‘hot’ bitcoins.

The Tracking Begins

Researchers have taken a nosedive down the rabbit hole to see if the thief can be tracked.  They found that bitcoins leave quite the paper trail, but really, just a paper trail.  Bitcoin transactions and wallets are shown in public for the world to see, making it very difficult to conceal stolen bitcoins.  However, bitcoin wallets can be anonymous, which means that all trackers can do is follow the trail from wallet to wallet without ever knowing who owns them.

What the trackers have to do is watch and wait for an ‘anchor’ to appear.  An anchor is basically information that ties a real-world individual to the ownership of a bitcoin wallet.  This often happens when the owner of the wallet exchanges the bitcoins for fiat currency (dollars, euros, etc.) -or when the owner makes a transaction, which tends to result in the divulging of anchoring information.  According to Vitalik Buterin of BitcoinMagazine.com:

“One might discover the Bitcoin address of that user’s employer, favorite businesses, customers, and much more – or, knowing more anchors, one might quickly figure out what that user’s favorite businesses are. Aside from simply “following the money”, there are also two more advanced tools that Bitcoin sleuths can use.”

However, this often does not happen, and the researchers are left with the monumental and endless task of tracking bitcoins through the blockchain.

Alice Just Became A Lot Harder To Find

Where the trail becomes far more complex is when an owner of a wallet sends his or her bitcoins through the ‘laundry’ utilizing what is called a ‘mixer’.  A bitcoin mixer is basically a way to make the flow of particular bitcoins almost impossible to track. It is a trust where several (or thousands) of wallet owners dump their bitcoins into a pot, the mixer shakes, rattles, and rolls around the bitcoins, and disperses them in random quantity sequences until all owners have the same amount of bitcoins from when they started.  For this service, the mixer charges a fee –however, for many wallet owners, the fee is worth the anonymity.  This process has stumped the trackers to the point of befuddlement.  According to Andy Greenberg of Forbes, even the ‘experts’ say that once bitcoins go through the mixer, the trail just about goes cold:

“If we had taken the extra consideration of shuffling our bitcoin expenditures through other addresses created with desktop-based wallet software, or gone to the further effort of sending them through a bitcoin “laundry service” such as Bitlaundry, Bitmix or Bitcoinlaundry, tracing them would have become much harder or even impossible.”

However, there are two issues with mixers.  First, the wallet owner must trust that the mixers themselves have honorable intentions.  If the bitcoins were stolen during the mixing process, there would be no way to prove that the theft even occurred.  Second, the wallet owner must trust that law enforcement isn’t taking a peak at the mixing.  It forces bitcoin owners into a nasty gamble.  But there may soon be an alternative method, which essentially creates an anonymous wallet, using anonymous mixing, with an anonymous peer-to-peer currency.

The method is called ‘trustless mixing’, and apparently it’s easy to use and just on the brink of being operational and available to the public.  According to Buterin:

“It’s experimental software,” Taaki says, “but it’s usable right now.” Anyone interested in running the mixer can simply download the source code and read the instructions here. Semi-decentralized, trustless Bitcoin anonymity has just been democratized.

This will change the game for bitcoin trackers, creating an almost impossible task to follow the flow of bitcoins to wallets So does another interesting sercive that goes by the name of

Bitcoin Dark Wallet – Dark Wallet is a light browser wallet relying on an independent Bitcoin implementation with out-of-the-box security and privacy features. Should be released in early 2014.  they are raising funds in indiegogo so can help it out here

Fat Cats Aren’t Invisible

Nevertheless, much anonymity still largely depends on the amount of bitcoins being tracked.  Researchers are certain that, yes, it is almost impossible to keep track of bitcoins that go through mixers, and especially if trustless mixers come into the equation –but at the same time, the larger the amount, the easier it is to follow the trail.  The mathematical principle behind this has to do with percentages of bitcoins in the overall economy, Buterin says:

“If a billionaire tried to mix their funds with blockchain.info, the mix would become 99% them – making the mixer essentially useless for the billionaire.”

In almost every report, the same principle comes into view: the more bitcoins there are in question, the less privacy there will be for the owner of those bitcoins.  It is very difficult to track a bitcoin equivalent of $100, but $10,000,000 is a different matter entirely.

In the blockchain, it pays to be as sly as a fox, but not a fat cat.

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