Bitcoin is the first uncensorable digital currency: When it moves between buyers and sellers, there's nothing anyone can do to stop it. The now-shuttered online marketplace Silk Road couldn't have existed before bitcoin, because it's unfathomable that Visa, Mastercard, or PayPal would approve transactions on an e-commerce site for buying and selling illicit drugs.
Bitcoin is often mistakenly described as a “fully anonymous” cryptocurrency. In fact, while global superpowers can't prevent you from spending your bitcoins, that doesn't mean they can't figure out what you bought. More than 100 Silk Road users have gotten into trouble with law enforcement since 2012, and the Snowden leaks revealed that the National Security Agency has worked to uncover the identities of other bitcoin users as well.
Though you don't need4 to give up your real name to use bitcoin, transaction histories are fully visible in an online ledger called the “blockchain.” Skilled digital forensics investigators can link your real identity to a bitcoin address by extracting information from pervasive “web trackers.” These are hidden programs installed on your computer that capture information about your browsing and purchasing habits. Trackers, which are used by Facebook, Google, the FBI, and all sorts of malicious actors, can also record an IP address, the numeric code that identifies a home internet network. “Anonymity is misrepresented in popular culture…it's not an absolute,” cryptocurrency researcher and security consultant Kristov Atlas writes in his self-published 2014 book Anonymous Bitcoin, a practical guide to concealing your identity. “The question at any given time is not, ‘Am I anonymous?' but rather, ‘How anonymous am I, and to whom?'”
There's no such thing as perfect anonymity, but a handful of best practices can go a long way toward shielding your transactions from government spies and other malevolents.
Step 1: Hold Your Own Bitcoins
Don't keep your bitcoins on a custodial exchange such as Coinbase. These sites store your identity and may share it with law enforcement agencies, making transactions about as private as mailing a personal check with a return address. Instead, set up a bitcoin “wallet”—a software application that enables you to send or receive bitcoins in a peer-to-peer fashion, directly from your own computer. With a wallet, the secret codes required to spend bitcoins aren't stored by a third-party company or somewhere in the cloud. You maintain them yourself.
Atlas recommends running your bitcoin wallet on a cheap, dedicated PC laptop with the open-source Tails Linux operating system, which makes internet use hard to track. Tails Linux is designed to run off an external USB drive. (Since your laptop won't be functional until you have a working operating system, start by downloading Tails Linux on a different computer and saving it to your external drive.) Every time you finish using your dedicated bitcoin laptop, turn it off, unplug it, and disconnect the battery. This creates a fresh, anonymous session for next time that throws off trackers.
Electrum is an excellent bitcoin wallet that comes preinstalled on Tails Linux. Supplement it with a hardware USB device like a TREZOR or a Ledger Nano S, which add additional security layers that make it harder for an attacker to steal your bitcoins. The extra device will also help you detect if malware that compromises your anonymity somehow made it on to your computer. You can set the Electrum wallet to open only if one of these devices has been inserted into your computer and verified with a pin.
Step 2: Buy Bitcoins in Person
Start the buying process with the anonymous Tor internet browser, which comes preinstalled on Tails Linux. (You can download Tor on any computer, but you're less likely to be tracked if you use it on your dedicated bitcoin laptop.) Navigate to LocalBitcoins.com to look for a nearby bitcoin seller. Don't use your real email account to register. You can generate a temporary, anonymous email address using a service like Dispostable.com.
Meet your seller at a coffee shop with a public WiFi network. Bring your laptop, and pay with cash. Once you're there, with a click of the mouse in your bitcoin wallet, you can generate a “receiving address”—an alphanumeric code that's the equivalent of a bank routing and account number—which the seller can enter or scan into his or her wallet to execute the transfer. Arrive in a borrowed vehicle or park far away. Don't give the seller your cellphone number, and don't show him or her pictures of your kids while waiting for your multiple transaction confirmations.
Step 3: Bury Your Trail With a Bitcoin Mixer
To obfuscate the movement of your funds, use a bitcoin “mixing” service. These are websites that accept your bitcoins and send you back different bitcoins that have no connection to your previous activities. It's like swapping cash for bills with different serial numbers. To make the transaction record harder to follow, mixing services will generally send the “clean” coins back to you in multiple transfers over a staggered time period.
The first step is to use your bitcoin wallet to generate several receiving addresses. (Again, a “receiving address” is the equivalent of a bank account and routing number—but bitcoin allows you to generate a fresh code with every transaction for better security.) Enter your receiving addresses into the mixer's website so it knows where to send your money when the time comes. Next, enter the receiving address of the mixer service into your bitcoin wallet. Execute the transfer.
After the payment is confirmed, the mixing service will send back the clean currency. Some services let you specify the intervals in which the payments will be made.
Bitcoin mixers do have downsides: Their fees can run as high as 3 percent, and they involve a degree of risk. You're trusting that the service won't maintain a record of your activities and that it won't abscond with your funds. But if you care about anonymity, mixers are an important tool for covering your tracks…