I recently published an article on Bitcoin as a human rights platform, in which I discussed many of the human rights that Bitcoin helps protect. However, I couldn’t care about the privacy of bitcoin. So I researched how to send and receive bitcoin privately.
Everyone has the right to privacy, according to Article 12 of the Universal Declaration of Human Rights. However, when you send and receive bitcoin onchain, this record is public. The party you are sending or receiving from can see your public address and can search Block Explorer online to see how much bitcoin is left in your wallet and other addresses you have interacted with.
Why is privacy important in bitcoin transactions?
First, if you have a substantial balance in your wallet, you don’t want anyone to find out because it exposes you to a $5 wrench attack. A $5 wrench attack occurs when someone discovers that you have a large stash of bitcoins and controls the keys to that stash. As a result, they physically attack or threaten you in exchange for your bitcoin. You don’t want to be in a situation where your life or your bitcoin is at stake. Therefore, it is in your best interest to keep your bitcoins private.
Second, it’s common knowledge that companies mine customer data and sell it to each other for targeted advertising and other purposes. Many people do not want others to know what they are spending their money on, with whom they are doing business, or where they are spending it. This is a difficult task when using banks, payment processors and e-commerce platforms as they are KYC protected and can benefit from this personal data.
So how do you trade Bitcoin privately?
Using Opendime is one of the easiest methods I’ve seen. Opendime allows you to load a predetermined amount of bitcoin onto a physical flash drive containing a private key. The recipient can pay another party by physically giving them the drive. To send bitcoin to the blockchain, you must physically punch a hole in the device. The idea is that you can exchange the flash drive for a good or service and the transaction is not recorded on the public blockchain, making it similar to a cash transaction. If you lose or damage the flash drive, the bitcoin is lost forever.
Another option is to use the Mercury wallet, which uses a statechain to send and receive bitcoin. The wallet supports a variety of bitcoin denominations, including 1000 sats (satoshis) and 10,000 sats. So when you deposit bitcoin, you exchange it for a range of satellite denominations that you can send directly to other Mercury users. Nothing is recorded on the bitcoin blockchain during the sending transaction, transferring the right to sign to the recipient. This ensures the confidentiality of your transactions.
A highly simplified example would be writing a draft email and then saving it. You then send the credentials to the recipient, who signs in and reads the draft. A crawler that tracks sent emails cannot bleach the privacy of the message. With Mercury Wallet, the email app has no way of accessing the draft message, and it has a fail-safe protocol where the sender can retrieve the draft message at any time if the app isn’t working.
This method allows you to send and receive bitcoin privately online, eliminating the transaction costs that would otherwise be required for on-chain transactions.
Other privacy strategies for bitcoin transactions include the Wasabi wallet, which uses a coinjoin functionality, and Bitcoin Laundry, which uses a shuffling protocol where you put bitcoin, mix it with other people’s coins, and then untraceable bitcoins same spends amount.
When trying to maintain privacy, be careful not to violate any anti-money laundering regulations in your jurisdiction.
Disclosure: I own bitcoin and other cryptocurrencies.