Cryptocurrencies are frequently termed as being anonymous because you can transfer tokens without providing identity verifying details.
However, reaching reasonable anonymity with cryptocurrencies is not as sincere. Perfect anonymity may be impracticable.
What do I mean by this statement?
Fundamentally, most cryptocurrencies are pseudonymous as resisted to being anonymous.
Blockchain technology, also known as the support of cryptocurrencies is a permanent public register of all transactions that can be located by any individual at any given point. As such, it is not a secret.
What happens is that the transactions in the blockchain are encrypted using public-key cryptography which covers the real identity of the people carrying out the transactions in mystery. This character makes cryptocurrencies pseudonymous.
To understand this,
Let us analyze a situation where an individual tweets under a pseudonym.
In case the pseudonym is connected to the individual’s identity, any tweet posted on their account will be matched to them.
For cryptocurrencies, the pseudonym is ordinarily the address to which you accept tokens.
Each transaction including that address is maintained forever in the blockchain. Therefore, if the wallet is combined with your identity, each transaction will also be traced back to you.
In Satoshi Nakamoto’s whitepaper, it was suggested that cryptocurrency users use unique addresses for every transaction to safeguard against transfers being connected to a sole owner.
This would be comparable to having several Twitter accounts under diverse pseudonyms.
While this maneuvering is still the most beneficial practice, it is not sufficient to discover complete anonymity due to its multi-input transactions.
Nonetheless, projects focused on developing completely untraceable cryptocurrencies have been in operation for some time now. Examples of cryptocurrency projects claiming to offer complete anonymity or are untraceable include Monero (XMR), Dash (DASH), ZCash (ZEC), and Verge (XVG).
Are Bitcoin Transactions Traceable?
Bitcoin is traceable, it is just publicly anonymous. Let me clarify...
Creating a Bitcoin wallet does not require you to provide identification, email, phone, or any personal data. You should be able to build Bitcoin wallets offline.
Each Bitcoin activities are traceable; In a simple sentence, I can view all the transactions made by a bitcoin address at any point in time available on the blockchain.
Of course, these bitcoin addresses will seem cryptic since there is no connection with identification.
Anonymity must, however, be protected. If you tell everyone that your bitcoin address is XYZ(example), then with a quick search, someone can relate the address to your name consequently killing anonymity.
Dealing on exchanges can also expose your identity to centralized organizations. Depending on the jurisdiction of these organizations, the government may find a connection between your banking details and your Bitcoin address.
Only a rare type of cryptocurrency claims to be untraceable.
Bitcoin and many of its clones are based on blockchain technology.
The blockchain is an entry that takes a very large amount of processing energy to create while taking almost no processing power to read.
Because the blockchain is readable by modest computing that is capped by almost every computing device now in survival the blockchain is an open book.
All businesses can be traced using blockchain explorer services or looking at the blockchain yourself on your local computer if you have a full bitcoin node running on it.
The reason bitcoin was said to be secret is because it does not list people's names and addresses and social security figures as part of its records.
The reality is that to get fiat currency in trade for bitcoin you must go through one of many currency exchanges.
Those currency exchanges keep accounts of each individual's bank data as well as many other personal identifying pieces of information that go hand in hand with assuring tax compliance and proper describing to government agencies monitoring probable money laundering.
That makes it possible to trace collateral or withdrawal to a specific bitcoin transaction and its relevant bitcoin transaction identifier.
So in broad, cryptocurrencies are traceable except for a few that have executed software and tactics to prevent tracing.
About Privacy and Safety:
Privacy and safety of the data can be processed while calculations are performed on it. Only users with the relevant decryption keys can access the private details of the data or transaction.
Cryptographic methods such as Zero-Knowledge Proofs (ZKPs) and zk-SNARKs already accept homomorphic encryption. A popular crypto-protocol named Zcash practices zk‑SNARKs to encrypt its data and only provides decryption keys to authorized individuals to them to see that data.
Data encryption (which only users with keys can unencrypt) and decentralized accommodation are two ways of blockchain that can store data secured. Join to that the fact that identities are indistinguishable as far as blockchains are concerned. However, here’s where the problem lies.
The blockchain is a supremely clever system, probably smarter than anything we have ever observed before.
Yet is that smart enough?
When a person sends payment to another, the address of the sender is confessed, accompanied by the address of the recipient and the sum. The identifications are kept secret, but there are many more ways to investigate the system’s capacities to obtain more information about a singular user. All the transactions made by Bitcoin are out in public.