Is Bitcoin anonymous? The short answer is no. While perceived by most as an anonymous payment system or currency, Bitcoin is far from it. Bitcoin, like many other cryptocurrencies is, in fact, pseudonymous. While it does not require a user to reveal his or her personal information, all the transactions that were ever made are public domain and can be seen by anyone in the Blockchain.
While the blockchain will not reveal your name, there are many ways of discovering one's identity through it. The most common would be through the exchange that you used to buy your Bitcoin, but other and more advanced techniques can be used to discover one's identity through patterns on the blockchain and other factors. These techniques have been used extensively in the search for Satoshi Nakamoto.
So, while there are ways to achieve anonymity using Bitcoin, it is not an inherently anonymous currency like Zcash or Monero.
One of these would be to use a bitcoin mixer. A bitcoin mixer is a third party service in which users send their coins in order to be mixed with others. So you send your coins and receive someone else’s. While this is a good way to throw off blockchain analysis it has many flaws. The most relevant one being the fact that you have to entrust your Bitcoin to a third party service. Furthermore, blockchain analysis can still be applied to some degree although most bitcoin mixers have features that make it near impossible like time delay and the option to send to multiple addresses. Another problem with mixer is that you do not know if the coins you’ll get are “clean”. You may end up with coins that have been used for illegal activities such as buying or selling items on the deep web which can lead to fungibility issues or worse.
One of the most obvious ways to trace users would be through the exchange in which they bought their Bitcoin. This method is, of course, reserved for the exchange operators and for law enforcement. Recently, the IRS has also expressed their interest in accessing Coinbase transactions in order to identify tax evasion cases (It is still unclear whether they will be granted access). How can we protect against this? Using a decentralized exchange like Bitsquare. These do not require you to reveal personal information about yourself. Of course, you can also mine your own Bitcoin instead of getting them from an exchange.
So, we see that Bitcoin is definitely not the best choice when it comes to protecting your privacy. Why is this so important if you have nothing to hide? Well, financial privacy is something that we are used to on some level. Our financial records are not public. No one, except the bank operators, knows how much balance there is in your account. Having the ability to keep your transactions and balances private is not just for personal cases. Merchants and businesses rely on this privacy to ensure competitors do not have too much information on them.
If you want to ensure anonymity while using cryptocurrencies it’s highly advisable that you use a cryptocurrency like Zcash or Monero. These have been developed to ensure your privacy. Zcash uses zero knowledge proofs, allowing users to choose between private or transparent transaction as the situation demands. While Monero uses unique one-time addresses for each transaction so that only the sender knows where the money went and it signs the inputs with ring signatures which only proves that someone in that group created it. That means only the receiver knows where the money came from.