Many people use bitcoin for a variety of reasons, from buying goods to paying for services, but the public blockchain can reveal all sorts of personal information about users. For example, when a user moves coins from one wallet address to another on the blockchain, that transaction can be traced back to their original wallet address. This can compromise their privacy and expose them to identity theft. Thankfully, there are ways to obscure the links between bitcoin addresses and real-world identities. One of the most popular methods is called bitcoin mixing. Mixers are services that jumble bitcoins from multiple users before sending them back to their original owners, masking the connections between the two addresses and protecting the users’ privacy.
Bitcoin mixers come in a range of forms, from centralized to decentralized. Centralized mixers typically operate as a business and keep records of all deposited and withdrawn bitcoins. This can be problematic for users, as the mixer could be compelled to release that data under a court order or by a government agency.
Decentralized mixers work by employing protocols such as CoinJoin or other privacy-enhancing techniques to obscure the provenance of funds on the blockchain. This allows them to function as a tool for cryptocurrency enthusiasts, and can help them avoid the scrutiny of regulators.
Despite their usefulness, some people have misconceptions about bitcoin mixing. These misconceptions are often spread by fake news websites or by individuals looking to profit from spreading misinformation. Misconception 1: Bitcoin mixers are illegal and used solely for illicit activities. Reality: While bitcoin mixers can be used for illicit purposes, they are primarily legitimate tools that individuals use to protect their privacy and prevent market manipulation.
A Bitcoin mixer works by combining the bitcoins deposited into the service with other users’ bitcoins in a large pool. The resulting jumbled bitcoins are then redistributed to new output wallets, often divided into several different addresses for added privacy. The mixer then sends the re-mixed bitcoins back to the user, who can then use them as they see fit.
In the US, regulators have taken a hardline stance against bitcoin mixers. The operator of Helix, a high-profile mixer, was arrested in 2021 on charges of money laundering, and the operators of Bitcoin Fog were also charged with similar crimes in 2022. In addition, many crypto exchanges now block withdrawals from mixers and will not accept funds that have a history of using mixers. While this is a positive step, more needs to be done to protect users’ privacy. For this reason, it is important to use best practices when using any cryptocurrency. Using strong passwords, enabling two-factor authentication, and using secure hardware wallets are essential to protecting your cryptocurrency assets and personal information. This is especially true for those who are active in the dark web and may be exposed to malicious actors who seek to steal or otherwise compromise their users’ assets.