Bitcoin, the digital currency underpinned by block chain technology, first entered circulation in 2009. Though users are only just beginning to scratch the surface of its full potential, Bitcoin is fast becoming the Internet’s favorite alternative to cash.
This year, the total value of Bitcoin transactions is expected to exceed $92bn – up around 240% from under $27bn in 2015.
Users hide their identity behind nicknames and alias addresses which raise a common misconception that Bitcoin is a tool for privacy. In fact, the false identities are fairly easy to trace, rendering any anonymity a mere illusion.
However, when Bitcoin is combined with a virtual private network (VPN), a cloak of invisibility and guaranteed privacy takes effect.
What is Bitcoin
To be successful, Bitcoin relies entirely on having a strong following. It is only valuable because a lot of people trust it and use it.
If this user community, or distributed peer-to-peer network as it is known, should suddenly disappear, then Bitcoin would no longer have any value.
In other words, Bitcoin derives its value from consensus. Every single user has a direct stake in what it’s worth.
Each Bitcoin user owns and controls their own currency outright. They are also wholly responsible for its security and storage.
No institution such as a central bank is required to hold, transfer or alter the value of your digital currency.
This decentralization of authority is one of the reasons it is so popular. It is a truly democratic global currency, free of any influence from politicians or nation states.
Why block chain technology is so trusted
The technology behind Bitcoin is called the block chain. The block chain can be thought of as a single digital bank account or ledger shared by the whole Bitcoin community that logs every transaction.
Many thousands of copies of this bank account are replicated across countless computers in the Bitcoin peer-to-peer network.
A single Bitcoin has its own unique signature. It may be copied many times. But it can only ever be spent once.
Bitcoin is spent using a pair of public-private keys. It involves matching a public key with a private one to create a secure transaction.
If an attempt is made to spend the same Bitcoin twice, the network will instantly recognize it as a double-spend and reject it.
This robust, built-in security feature makes Bitcoin almost impossible to tamper with, helping to explain why it has become so trusted and successful.
Cyber attacks on block chain
There have been a number of successful cyber attacks on digital currencies using block chain technology. In June, cyber criminals succeeded in siphoning off $50m from a new venture capital fund that used a digital currency called Ether.
Another successful attack took place on a Hong Kong-based digital currency exchange in August. About $65m was lost.
Experts are putting these events down to teething troubles with adapting to a new technology rather than any issue with block chain itself.
In the future, block chain may even be used to detect cyber crime by showing patterns of criminal behaviour as they happen.
The consensus appears to be that while block chain seems scary in these early days, it will ultimately lead to a more secure world.
Aliases and anonymity
Everyone on the Bitcoin network operates under a pseudonym.
This leaves users free to conduct transactions quickly but without revealing too much personal information.
However, just because you use a nickname it does not mean you are anonymous.
User addresses can be traced in a number of ways for example if the same address is used for multiple transactions; the proportion of funds received by an address that can be traced back to another address (known as “taint”), payments tracking, IP address monitoring nodes and so on.
Once broken this privacy is difficult and sometimes costly to recover.
The role of VPN
VPN together with Bitcoin ensures a user retains anonymity regardless of any parties eavesdropping on the network connection. Encryption meanwhile secures all online data between the user and the VPN server.
The two in combination are a great way to purchase digital commodities like software, books, white papers, reports and databases.
Of course, the cloak of invisibility falls away the moment you buy something that needs to be shipped to a physical address.
In summary, while the Bitcoin world of aliases and secrecy does convey an illusion of privacy it is still possible for a determined adversary to track transactions.
In this respect, it cannot be considered anonymous.
However, when Bitcoin is used in combination with a VPN to buy digital goods, it becomes virtually impossible to identify the buyer.