Written by Keegan Francis
Sending bitcoin is easy nowadays. Just scan a QR code or enter the receiving address, press send and you’re done.
But how private is sending bitcoin? And more importantly, what is better, native bitcoin privacy tools such as CoinJoin or independent privacy coins such as Monero or Zcash?
There are tradeoffs between using a dedicated privacy coin versus bitcoin privacy tools. Both methods help the user transact on the internet with varying degrees of privacy.
A range of privacy coins exist, each with their own approach to ensuring built-in anonymity. Bitcoin privacy tools work a bit differently, as it sometimes requires users to be extra careful to avoid making mistakes that could reveal their identity.
Between bitcoin privacy tools or privacy coins, which one is better and easier to use for maintaining financial privacy on the internet? Can you track bitcoin transactions easily? With this bitcoin privacy guide, we’ll dig deeper in the subject and provide you with all the answers.
In this article we take a close look at all the aspects that are important and examine each technology so you can make an informed decision. Read on, learn and enjoy. And don’t forget to share it with your friends if you found it valuable. We appreciate it.
Let’s get this battle started.
Legality of privacy coins and bitcoin
Before diving into the details of privacy coins, certain questions about legality must be addressed. Many cryptocurrency exchanges have opted not to include privacy coins among the list of cryptocurrencies they support.
In the case of a bitcoin-only exchange or broker, you won’t even see any other coin except for bitcoin.
This is because privacy coins tend to be held to higher scrutiny by regulatory bodies. And licensed exchanges and brokers have to comply with the rules set by these regulators.
Countries like South Korea and Japan have outright banned the holding and trading of privacy coins. As rules progress in countries around the world, others are expected to follow. Bitcoin can also be banned, as is the case with China.
Although bitcoin privacy tools aren’t officially banned in most placed as of writing of this article, exchanges are advised to monitor and limit its use.
Chain analysis tools
The exchange Binance for instance has been found to limit a user’s account after mixing was detected after he had withdrawn funds.
Regulated exchanges have to deploy blockchain analytics tools to meet regulators demands to implement financial surveillance. They can use chain analysis tools such as CipherTrace or Chainalysis to link identities to bitcoin addresses.
This allows the exchange to monitor profiles and clusters and identify patterns of “illicit behavior” which they then need to report to regulatory supervisors.
Due to the transparency and public nature of the bitcoin blockchain, it offers much less privacy by default. Regulators have treated bitcoin more favorably because of this. But the same tools are not as effective on privacy coins. Bitcoin users who wish to preserve their identity must use a range of tools to hide their identity.
What kind of privacy coins exist?
What differentiates each privacy coin is the type of cryptography it uses to obscure the details of transactions.
We don’t need to go into every detail about how each algorithm and coin is structured. Nothing a couple of coins and describing their main function in plain terms will be sufficient to understand their differences.
It is worth mentioning that privacy coins in general can be seen as a privacy tool in and of themselves. They have the potential to be used alongside bitcoin and enhance any monetary privacy strategy.
For example you can trade Bitcoin into Monero through a swapping service or decentralized exchange and thereby cut off the surveillance system. However, some experts argue this could actually decrease your privacy.
Monero is one of the most popular privacy coins in existence. It is also one of the oldest, having launched in 2014.
There are three main features that sets Monero appart according to fans and developers. They are Ring Signatures, RingCT, and Stealth Addresses. Ring signatures obscure the sender and receiver while RingCT hides the amount being sent.
Finally, stealth addresses ensure that each address is only ever used once.
This trifecta of cryptography is what makes Monero an effective option for ensuring privacy. Address reuse should be avoided with bitcoin but with Monero it’s not a problem as the developers claim.
Every good feature comes with a tradeoff and experts have been questioning the technicalities of Monero for years. Time will tell if Monero will be able to scale or of Bitcoin’s up and coming privacy improvement could make Monero obsolete.
Unlike Monero which has bulkier transactions, Mimblewimble aims to be more lightweight and scalable.
The blockchain remains lightweight because there is no need to download every single block from the beginning. It uses a feature called FlyClient, that allows new nodes to download checkpoint blocks, instead of the entire blockchain.
Lastly, transaction amounts as well as sender and receiver information is hidden from onlookers. Mimblewimble has a set of privacy enabling tools, but GRIN lacks traction in the privacy coin market.
Despite its lack of consumer adoption, it remains a potential tool for ensuring privacy. The creators of GRIN are transparent and advise: “It’s very young and experimental. Use at your own risk!”
A popular privacy coin is zCash. It began in 2016, and has since grown a loyal following of users and developers.
zCash hides the details of transactions by making use of zk-snarks, or “zero knowledge proofs.” Users can selectively show or hide account balances and transaction details by sharing certain keys.
If a user wishes for someone to know the details of their transactions, it is within their power to reveal that information. zCash is listed on many cryptocurrency exchanges in the world, possibly because of its slightly more flexible security and privacy schema.
Similar to all the other privacy coins, zCash might not last forever, given new advancements in bitcoin privacy will come out.
List of bitcoin privacy tools
Perhaps the most important part of a privacy coin or money that can be used privately, is where that money can be used. Bitcoin is by far the most widely accepted digital currency in the world, making it desirable to add privacy preserving tools on top of it. Luckily, there is a host of developers building specialized applications for the use case of Bitcoin privacy.
Privacy Bitcoin Wallets
Privacy-oriented bitcoin wallets such as Wasabi Wallet, Electrum Wallet or Samourai Wallet bring bitcoin privacy technology to the end user.
These wallets are often developed and maintained by some of the best cryptography and privacy experts alive and a hot debate takes place between the providers whether one or the other approach yield better results for people’s financial privacy.
While it’s great to have a competitive market and a variety of options to choose from, users must be very educated to make informed decisions and not get overwhelmed.
To give you an overview it could be summarized that at the core of all privacy wallets is the option to connect through Tor, manage your UTXOs and have access to CoinJoin or other mixing technologies. Tor, UTXO management and CoinJoin are essential pieces to manage your bitcoin privacy.
Of course it should be a standard for any bitcoin privacy wallet to not collect any user data, that it’s non-custodial and open source so that independent researchers can review the source code.
Bitcoin privacy wallets are a fantastic option to improve your privacy on-chain and reclaim your financial data.
CoinJoin and Join market
You have probably heard of CoinJoin if you learn about bitcoin. Let’s take a look at this privacy-enhancing technology.
According to the developers: “CoinJoin is a trustless method for combining multiple Bitcoin payments from multiple spenders into a single transaction to make it more difficult for outside parties to determine which spender paid which recipient or recipients.”
Users are essentially collaborating with one another in order to reach a common goal. Everyone puts their coins in a bag, shakes it up, then pulls out as much bitcoin as they put in. Coinjoining costs the user a small fee which is paid to people who have provided their bitcoin to join markets.
Sounds nice in theory, but how easy is it to use it?
Join market is an online marketplace where people can meet and coordinate coinjoin swaps. However don’t think of it like Ebay or Amazon, it’s more automated and anonymized.
Some bitcoin wallets come built-in with the ability to mix bitcoin in join markets which use CoinJoining to anonymize the inputs and outputs of bitcoin transactions.
Wasabi wallet is an example of a wallet with integrated join markets which is coordinated by the wallet provider. For this reason, the wallet makes it very simple and user friendly to conduct CoinJoin transactions with other people.
Lightning Network private channels
The Lightning Network is a decentralized protocol for payments and Bitcoin’s most successful second layer with over 4.500 BTC locked in Lightning channels.
The Lightning Network allows users to conduct free and instant transactions and adds a layer of privacy to bitcoin which brings it closer to the goal of being an anonymous payment medium.
Lightning channels work by participants exchanging unbroadcasted bitcoin transactions with one another. Since only the sender and receiver need copies of their transactions, no details need to be shared with anyone else, i.e., the routing nodes that connect two peers. All information is kept between participants.
The Lightning Network is many channels operating alongside one another. A private channel is one that is only established between two parties. All transactions between these two parties are kept exclusively between them.
There is a lot of discussion and research around the privacy of Lightning transactions and developers are always coming up with new features and upgrades. Lightning transactions are however considered to be one degree more private than on-chain transactions, but with all tools, it depends on how you’re using it.
One issue with Lightning is whether or not the bitcoin address used to start the lightning channel has been doxed. For that, we turn to mining.
Mining and Virgin Bitcoins
Bitcoin mining is also a tool for preserving one’s privacy. Freshly-mined bitcoin do not have a history of passing through people’s and exchange’s hands.
From a privacy perspective, so-called “virgin bitcoin” are considered to be of the highest grade. Therefore there is a bit of a premium on newly-mined bitcoin, as having them ensures that your identity is not vulnerable due to links with previous owners of the same coins.
Mined coins that make their way onto exchanges are no longer “virgin” and privacy implications in regards to their UTXO sets have to be considered just as with any normal bitcoin transaction.
Starting a private Lightning channel with freshly-mined bitcoin is an excellent way to preserve one’s privacy while using bitcoin although it requires technical knowledge.
Privacy coins vs. bitcoin privacy tools results
It comes down to a matter of preference and what a user intends on doing with their privacy. There is a benefit to using bitcoin because it is the most widely accepted and most secure digital money.
Privacy coins on the other hand provide better built-in privacy. The trade-off is acceptance and adoption.
So what about 10 years from now? Will Monero and zCash be just-as-accepted as bitcoin is now? Or will Bitcoin privacy solutions such as CoinJoin be a default for any wallet and exchange?
If so, then bitcoin might have some competition from a privacy perspective. Other coins have arguably interesting and fascinating approaches to ensuring privacy.
For now, bitcoin remains the most widely accepted internet money with many ways to use it privately such as the Lightning Network, CoinJoins and simply avoiding any KYC touchpoints and being careful of UTXOs and general online privacy.
Privacy coins frequently asked questions
What is a privacy coin?
A privacy coin is a cryptocurrency that uses cryptographic schemas to obscure identifiable information within transactions such as transaction amounts and sender/receiver addresses. In short, a privacy coin (often a shitcoin) claims to have better privacy features.
Which is the best privacy coin?
The best privacy coin depends on the use case and the preference of the user. Technically speaking, Mimblewimble has an elegant ensemble of privacy preserving features.
Monero is most widely adopted and the largest privacy coin by market cap hence Monero is seen as the “OG” or the “Bitcoin of privacy coins” by many users.
However, there is an argument to be made that the best privacy coin is the one that is most widely accepted. No privacy coins are widely accepted, therefore it is better to use bitcoin privacy tools for online anonymity rather than a bespoke privacy coin.
Can you buy privacy coins in Australia?
A number of cryptocurrency exchanges such as Coinspot will sell zCash (ZEC) and Monero (XMR) to their users.
How many privacy coins are there?
There are many privacy coins beyond XMR, ZEC, and GRIN. Although most other privacy coins are copies or clones of these primary three. Most experts classify privacy coins as shitcoins as they use marketing language to sell pre-mined tokens.
Are privacy coins legal?
Privacy coins are typically in a legal gray area and not yet defined by regulators, or totally outlawed. Japan and South Korea have both opted to ban them, while countries like the United States have yet to make an official ruling.
Is bitcoin good for privacy?
A bitcoin wallet can be created without KYC and is therefore private. Even a transaction can be done from a wallet to wallet without showing the initial users private details. In comparison to credit card transactions where you have to send from a personal bank account, bitcoin is very private.
Can the police trace bitcoin?
All the transactions made on the blockchain are open to the public. This means that everyone from private persons to authorities can track the actual transactions. What they can’t know is who’s actually behind the transactions.
Can bitcoins be anonymous?
Bitcoin itself is private and anonymous by nature. The only way to disclose the owner behind one is if the KYC documents would be leaked from an exchange or if the owner itself told anyone that they owned it. That’s one of the reasons it’s recommended to keep the bitcoin off of exchanges for it to stay anonymous.