Private Bitcoin: An Introduction

You may listen to the podcast version of this essay here.

Dear privacy seekers,

Let’s talk Bitcoin. Bitcoin is a digital asset. What does that mean? Well, it is digital in the sense that it only exists as part of a computer program. It is an asset in the sense that it has been programmed to have many of the attributes of money: durability, portability, divisibility, scarcity and, of course, by the fact that many people have invested their belief in Bitcoin as money such that the market cap of Bitcoin is reaching toward $1 trillion at the time of writing this. At least right now Bitcoin is a valuable and quite convenient way to store and share wealth somewhat privately. But let’s unpack in the next bit of time Bitcoin’s features and its privacy potential.

First, a brief background of financial privacy and ownership. In my privacy guide I discuss how modern finance in the last few centuries has relied on banks to conveniently store, protect, and transport money. Banking of this kind was an advancement, for sure, but in recent decades banks have become a hindrance to privacy, convenience, and ownership. As government power exploded in influence in the twentieth century, large corporations such as big banks latched onto this power like a parasite. Governments asked banks to spy on their clients, to restrict what kinds of assets they could have, and to prevent or hinder them from taking out money and sending it elsewhere. This is today a hopelessly corrupt system where government regulators come from and return to private banking institutions: for many intents and purposes large banks and the government are one and the same.

This fact is particularly tragic since banking culture has so enveloped our worldview that doing business outside of a bank makes one a suspicious person. Try paying for something of substance with a few hundred dollar bills in Boston or a handful of fifty pound notes in Leeds and see how long that works before you get a nice chat with the police or your resident taxing agency. Trying paying for something online without a bank account or a credit card account. Countries such as France and Italy in recent years have passed laws requiring one to report physical cash transactions of as little as 1000 euro, this following various terrorist attacks in Europe. There are innumerable examples I could give of this nonsense. Finally, banks are behind the times in terms of technology to send and receive money, and place extraordinary restrictions on such actions. Large banks in the West are surveillance industries that don’t hold the money you give them, don’t let you do what you want with it, and slow you down whenever they do approve of your actions.

The main advancement of Bitcoin is that it makes you a bank unto yourself. Let’s say you have an open-source Bitcoin software wallet with five bitcoin in it. You own all of this: the software and the bitcoin. Assuming you safeguard your passwords and computer, no one can take it away from you. In a matter of minutes—maybe thirty on a bad day—you could send that five bitcoin, minus a small transaction fee taken out of the total, to anywhere in the world where the Internet can be accessed without any permissions needed. You simply press a few buttons and it is on its way. You are in control. You choose what you do with your bitcoin. Your bitcoin is not even held in a central database during this process but in a decentralized system which no single person or institution owns. These are the kind of features that get people excited about Bitcoin.

To truly own bitcoin as I’ve just described and have any possibility of privacy you must possess it in a wallet of your own. A wallet is simply a piece of software that grants you a private key to your Bitcoin and reserves a spot on the blockchain for you to store it. An excellent wallet for first-timers users is Electrum. You visit their website, download it, and go through the process of creating a wallet. During the creation process you will have to create a password and you will be given a seed phrase. A seed phrase in practical terms is simply another password and is a combination of twelve or more words. It’s important to understand the difference between a regular password and a seed phrase. Your password gets you into the wallet you have created on your current computer. When you make a wallet it actually saves a file on your computer and your password gets you access to that file. Just like any kind of software. That’s pretty straightforward. But let’s say you forget your password, you lose that file on your computer, or you want to access your bitcoin from another computer. That’s where your seed phrase comes in. The seed phrase is the actual identity of your bitcoin wealth. With a seed phrase you can download Electrum from anywhere in the world, build a new wallet by typing in the seed phrase, and have access to your previous bitcoin. The seed phrase is radical because it ensures you don’t have to walk through airports with Electrum downloaded on your computer. As long as you remember the seed phrase, you can download that same wallet anywhere and have your bitcoin at your fingertips.

Okay, so you have your wallet, your password, and your seed phrase. You’re now in Electrum where you can send and receive Bitcoin. That’s about all there is to it. From here you can participate in the crazy world of Bitcoin. To send someone bitcoin you must know their address, or have the QR code connected to that address. To receive bitcoin your sender must have your address—a string of random characters—or your QR code. Fortunately Electrum allows you to create unlimited sub-addresses so that you never have to give out your actual primary address. This you can accomplish by going to “Receive” and then clicking “New Address.” Whenever you send bitcoin a small fee is assessed and given to the Bitcoin miners who will process the transaction. Bitcoin fees are notoriously high at present for some complex reasons, and people are trying to work on solutions. But that’s all you need to know about the basic functioning of Bitcoin.

Okay, so what about privacy? Bitcoin is not exactly private, and is in some ways very anti-private, even if it does present a lot of opportunities for privacy-seekers and particularly for freedom-seekers. We’ll discuss privacy coins in a minute, but the main subject for us right now is the juggernaut of Bitcoin. This is where we get into the blockchain. The blockchain is the system of Bitcoin, which as a money software involves a ledger that records every transaction that everyone makes. Without a central authority, well, we are all authorities, and the fact that everyone can see the transactions is proof that they are what they say they are. In short, the blockchain allows Bitcoin’s decentralized system to work. But blockchain tracking is a serious problem, and something not discussed enough. You can very easily visit a blockchain explorer website such as BitcoinWhosWho, type in a wallet number, and see how much that wallet holds. You can see historical activity including the other wallets it has sent to and received from. By doing so you can see what things this person buys, who they interact with, possibly where they live, and how active they are in the markets. You can infer any number of things, and people have. The IRS seems to have developed software to track such endeavors, private open-source intelligence researchers have developed and continue to develop techniques, and you can be sure that government spy agencies and police are hard at work making sure you cannot pull a fast one on them. In short, the Bitcoin blockchain is completely transparent and is dangerous for privacy unless one uses it wisely and purchases one’s bitcoin without attaching one’s identity to it.

Unfortunately the way 99% of people acquire and use Bitcoin is antithetical to privacy. If you buy bitcoin through a broker such as Coinbase, Paypal, Robin Hood, or the Cash App, then you don’t actually own it—the broker does—and you will have to do all kinds of KYC (know your customer) registration in order to get “verified” enough to use the service. Congratulations, your bitcoin is now connected to this personal information. Furthermore, some of these brokers, particularly PayPal and Robin Hood, do not let you move your Bitcoin out of their system and into your own wallet, which would grant you ownership! So why do people use services like PayPal and Robin Hood for Bitcoin? Well, because they don’t understand how Bitcoin actually works and/or they’re only interested in it from an abstract investment perspective. At least Coinbase and Cash App let you transfer your Bitcoin to a non-custodial wallet such as Electrum—albeit after a delay of several days depending on the service (for “safety” reasons). In short, if you want to own bitcoin privately and fully, you have to acquire it differently and ideally not go through a broker.

To have private bitcoin you must acquire it privately. There are a number of ways to do this, which I will discuss in more depth in the future, particularly in a course on buying bitcoin privately that I offer. But for now, know that Bitcoin ATMs are one option. Find an ATM in your area using CoinATMRadar.com and investigate it to see if they require any KYC information from you. The kind of ATM you want is one that doesn’t require anything, but even if it does require a phone number, it’s easy enough to visit a website that generates a SMS verification response and thus avoid your actual number. ATMs are uneven in quality, prone to slowness and high fees, and you’ll want to wear a mask since they’re often in public places.

The other really good option is to acquire bitcoin from someone who already has it. To find such people you should check various online gatherings, attend a Bitcoin meetup, and basically use your creativity to determine where crypto people hang out. Make sure to bring your laptop with you and connect to WiFi to confirm that the transaction has gone through. Take all safety precautions and meet in a public place, obviously. Alternatively, you could sell something, create a YouTube channel, or trade cash, or offer a service and request Bitcoin in exchange. It’s not just brokers who own Bitcoin. Individuals own it and are willing to part with it if you can find them and give them something in return. Websites and programs such as LocalCryptos.com and BISQ also connect you with peers who are willing to sell: this process if done correctly can be fairly private.

I’ve noticed a lot of people don’t understand private Bitcoin purchasing, which is why I created an extended course on the various, if sometimes complicated ways, of acquiring it. There are a lot of misleading videos out there promoting outdated or misleading services such as Paxful, which in the end requires proof of ID in most cases, or promoting other ideas that ultimately attach your name or personal information to the transaction. Or charge ridiculous fees. Remember, if you want private bitcoin, you cannot surrender any personal piece of information anywhere along the way. That includes your IP address, but you should be using a VPN at all times anyway. We haven’t even discussed the important arena of coin control, which involves the privacy measures one must take to privately own and use bitcoin after it gets into your wallet.

Alternatively, we can discuss and will discuss more in the future privacy coins. Because of Bitcoin’s privacy problems, other cryptocurrencies have cropped up to do the job. Today Monero is the most widely supported privacy coin. Monero, along with Pirate Chain, have a number of features that make their blockchain difficult to decipher. But Monero and especially Pirate Chain are not widely used. A good money is owned and accepted by many, and Monero, Pirate Chain, and even Bitcoin are simply not used widely enough at the moment. Still, Monero can be very handy indeed for those who will accept it. You can acquire Monero in some of the same places as Bitcoin, though not nearly as many, and in some cases Monero has been declared illegal by governments who demand privacy for themselves but don’t grant it for regular people. We’ll get into privacy coins in the future, including how they can be used to make your Bitcoin private. But just know that Monero exists.

Ultimately, very few people have money in Bitcoin, and only a tiny percentage of those people actually own Bitcoin, by which I mean they have possession of it in a wallet that required no personal information. In order to have the possibility of using Bitcoin as a true owner, and in a private way, you should only ever own it in a wallet that you yourself control. I encourage you to test out the cryptocurrency vector. Does Bitcoin have intrinsic value? Maybe not. Could it collapse? Definitely. But its potential is undeniable, and its success will depend on how many of us are willing to trade some of our fiat money for it and start up a new system that is more freeing and less monitored than the old system.

Yours in peace and privacy,

Gabriel Custodiet
https://watchmanprivacy.com