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Wealthcoin founder Simon Burns discusses what he's learned trying to raise seed capital for his latest bitcoin startup.

Bitcoin is not anonymous, but, rather, pseudo-anonymous. By now, most Bitcoin veterans know this. It’s less obvious to many, however, why Bitcoin is not really anonymous by default, and what can be done to de-anonymize Bitcoin users – and what Bitcoin users can do to reclaim their privacy.

Below is an advanced beginners guide to get a better understanding of the nuances of Bitcoin and anonymity.

To better understand Bitcoin’s anonymity, it's necessary to first understand how Bitcoin works on a basic level.

Most importantly, the Bitcoin protocol effectively consist of a series of transactions. These transactions are basically a package of different kinds of data, among which are transaction inputs and transaction outputs. Inputs refer to Bitcoin addresses used to send bitcoin from, and can only be spent using the private key associated to that address. Outputs effectively refer to addresses used to send bitcoin to. Each Bitcoin transaction transfers bitcoin from one or several inputs to one or several outputs (therefore, transferring bitcoin from one or several addresses to one or several addresses).

It's possible for a transaction to simply have one input and one output. But that is rare, as it would require that the amount of bitcoin to be sent (the output) precisely equal the amount of an earlier amount received (the input).

Instead, it's quite common that a transaction consists of multiple smaller inputs in order to make for one larger transaction. If someone, for instance, controls three different inputs of one bitcoin each, and needs to send 2.5 bitcoin to an online store, the software will merge all three inputs into a single transaction.

And it's even more common that a transaction consists of multiple outputs. This is because Bitcoin uses change addresses. Change addresses allow users to create a transaction that returns the excess amount of bitcoin from one or several inputs back to the original sender. So in the example above, the software will typically create two outputs. One output attributes 2.5 bitcoin to the address belonging to the online store, while another output will attribute .5 bitcoin back to the newly generated (change) address controlled by the sender.

What makes bitcoin 'anonymous'?

There are generally three reasons why bitcoin is sometimes regarded as anonymous.

First, unlike bank accounts and most other payment systems, Bitcoin addresses are not tied to the identity of users on a protocol level. Anyone can create a new and completely random Bitcoin address (and the associated private key) at any time, without the need to submit any personal information to anyone.

Second, transactions are not tied to the identity of users either. As such, (and as long as a miner includes the transaction in a block) anyone can effectively transfer bitcoin from any address to which it controls the (private) keys, to any other address, with no need to reveal any personal information at all. Like physical cash, not even the receiver needs to know the identity of the sender.

And third, Bitcoin transaction data is transmitted and forwarded by nodes to a random set of nodes on the peer-to-peer network. While Bitcoin nodes do connect to each other using IP-addresses, it's not necessarily clear for nodes whether the transaction data they received was created by the node they connect to, or if that node merely forwarded that data.

How is anonymity defeated?

There are basically three ways to de-anonymize Bitcoin users.

First of all, even though Bitcoin transactions are randomly transmitted over the peer-to-peer network, this system is not airtight. If an attacker, for instance, has the means to connect multiple nodes to the Bitcoin network, the combined data collected from these different nodes might be enough to determine where a transaction originated.

Second, Bitcoin addresses can be linked to real identities if these real identities are used in combination with the Bitcoin addresses in some way. This includes addresses used to deposit or withdraw money to or from a (regulated) exchange or wallet service, publicly exposed donation addresses, or addresses simply used to send bitcoin to someone (including the online store) when using a real identity.

But perhaps most importantly, all transactions over the Bitcoin network are completely transparent and traceable by anyone. It's typically this complete transparency that allows multiple Bitcoin addresses to be clustered together, and be tied to the same user. Therefore, if just one of these clustered addresses is linked to a real-world identity through one or several of the other de-anonymizing methods, all clustered addresses can be.

Let’s take a closer look at clustering.

A very basic clustering method is the analysis of transactions networks. In its most basic form, this refers to the several inputs combined into a single transaction. While these inputs could have originated from different addresses, the fact that they were combined into a single transaction suggests that all these inputs – and therefore all related addresses – are controlled by the same user.

Similarly, there are various methods to identify change addresses as being change addresses, which links them to the sender of the transaction. This is fairly straightforward when receiving bitcoin; the output that is not attributed to you is typically (though not always) attributed to the change address controlled by the sender. In addition, some Bitcoin software, reveals the change address to attentive onlookers, too. It does so, for instance, by always creating a change address as thelast output of a transaction. The use of multisig-addresses can be a giveaway as well.

Another clustering method is taint analysis. Taint analysis is fairly straightforward, too, and is even offered by several freely accessible block explorers. Basically, taint analysis calculates what percentage of bitcoin on a specific address originated from another specific address, whether the addresses are one transaction separated from each other – or more.

And then there's amount analysis and timing analysis. Amount analysis, as the name suggests, doesn't track specific transactions, but rather specific amounts. Similarly, timing analysis tracks specific times. If, for example, one input is exactly 2.6539924 bitcoin, and an unrelated output is exactly 2.6539924 (minus fee) one block later, it suggests that the sending and receiving addresses belong to someone using some kind of mixer (see below).

Bitcoin privacy is still very much an arms race. While progress is being made to improve Bitcoin anonymity on one hand, possible methods to de-anonymize users are often established on the other. And while it is beyond the scope of this article to explore all potential future possibilities to improve anonymity, there are some basic methods to increase privacy on the Bitcoin network available right now.

One such a straightforward solution is using TOR or other methods to hide IP addresses. If Bitcoin transactions are transmitted over TOR, there is no way to determine where they originated from (granted that TOR itself does as promised, of course).

Another basic solution to increase privacy is creating a new address for each transaction. Creating a new address for each transaction makes it harder to link addresses to real identities, as it would at the very least require more clustering to do so. An increasing number of Bitcoin wallets do this automatically using hierarchical deterministic (HD) wallet software.

A slightly more advanced method to gain privacy is the use of mixers. Mixers exist in multiple shapes and forms, but they basically enable that everyone using the mixer receives each others' bitcoin. If done well, mixing counters the analysis of transaction networks as well as taint analysis. And for improved results, mixing can be repeated.

One example of such a mixing strategy is CoinJoin, which merges inputs from and outputs to several users into one transaction – breaking the assumption that all inputs belong to the same user. CoinJoin does not, however, remove all taint from a Bitcoin address, since the inputs and outputs are still connected to some degree.

Alternatively, some mixers can remove all taint, as they return unrelated bitcoin from completely different addresses belonging to the mixer. However, these mixers are typically centralized, and as such will know the sending and receiving Bitcoin addresses belonging to users.

Additionally, to counter amount analysis, mixers can require all users to submit the same amount into the mix. Alternatively, mixing services can charge a random fee, making it harder for an outsider to link the amount of bitcoin sent to the amount returned. Furthermore, it's possible to break up the amount mixed, further obfuscating the coins, while smaller amounts are easier lost in “the crowd” of transactions.

To counter timing analysis, moreover, mixers can wait some random time before they send coins back; the longer this range, the harder it becomes to link transactions. Furthermore, extending the mixing time increases the likelihood of transactions to be obfuscated with normal transactions.

But in the end, Bitcoin privacy is still a sliding scale – not a binary problem. Rather than being either completely anonymous or not at all, Bitcoin users enjoy a certain level of privacy, depending on how much of their identity they reveal, which of the anonymizing techniques they apply, how many, and how often.

N.b.: For specific examples of mixing techniques, see the research paper cited below.

The article is largely based on 'Research on Anonymization and De-anonymization in the Bitcoin System', an ATR Defense Science & Technology Lab. paper by QingChun ShenTu and JianPing Yu from Bitbank Research Labs, published by Shenzhen University. Additional thanks go to Bitsquare developer Manfred Karrer and Blocktrail co-founder Jop Hartog for providing feedback on an earlier draft of this article.

The post Is Bitcoin Anonymous? A Complete Beginner’s Guide appeared first on Bitcoin Magazine.

Bitcoin Core developers including Gavin Andresen expanded on their larger vision for bitcoin development at an MIT event yesterday.

The leading stock exchange Nasdaq is no newcomer to the brave new world of blockchain technology. In May, Bitcoin Magazine reported that Nasdaq would begin experimenting with the blockchain technology that powers Bitcoin, starting with a pilot project in Nasdaq Private Market , a marketplace that handles pre-IPO trading among private companies.

Interestingly, Nasdaq didn’t plan to develop an alternative blockchain. Rather, the company said that it would leverage the colored coin protocol Open Assets, which works on the original Bitcoin blockchain. In June, Nasdaq partnered with San Francisco-based bitcoin API startup Chain to implement the Bitcoin blockchain technology.

Nasdaq is scheduled to launch the pilot project operationally later this year, helping companies keep track of the shares they issue and enabling them to almost instantaneously settle transactions, Nasdaq Co-President Hans-Ole Jochumsen, said in an interview reported by Reuters.

Jochumsen added that Nasdaq is planning to develop several blockchain applications through its operations in Estonia. Nasdaq owns the Tallinn Stock Exchange, Estonia's only regulated secondary securities market, as well as the Estonian Central Securities Depository (ECSD).

The ECSD administers share registers for all joint stock companies operating in Estonia, as well as all securities and pension accounts opened in the country and other electronic securities, such as private company shares, bonds and securities transactions histories. The ECSD also provides clearing and settlement services for securities trading, payments of corporate dividends and interest, and other securities-related services.

"[Estonia is] a smaller country, so it's not very complex in size, and there is a government that is very keen to use technology,” said Jochumsen. “They claim that they are in the forefront of using technology in the public center worldwide."

Estonia is, indeed, a leader in deploying advanced communication technologies in the administration and public services sectors. In 2014, Estonia invited anyone, anywhere, to become an e-citizen of the Estonian digital society, open a bank account in Estonia, or start a business. The Estonian e-Residency program, launched on December 1, 2014, is an innovative and potentially disruptive initiative that enables anyone with an Internet connection to establish a financial base in Estonia, with no need of being physically present.

Banks and startups in Estonia are developing financial service applications based on the blockchain, which use the same technology – colored coins on the Bitcoin blockchain – selected by Nasdaq, and could be related to Nasdaq’s initiatives in Estonia.

In particular, LHV Bank is developing CUBER (Cryptographic Universal Blockchain Entered Receivables), a new kind of certificate of deposit designed to be used to store or generate value, transfer value, manage liquidity and automate transactions between machines, which can be used as a building block for innovative financial products, Finextra reported in June. LHV claims it is the first bank in the world to experiment with real programmable money, issuing receivables in the form of colored coins.

In parallel, LHV Bank set up fintech technology startup Cuber Technology, which together with Swedish “blockchain 2.0” company ChromaWay is developing the IOS and Android app Cuber Wallet for fast, free, peer-to-peer (P2P) mobile fiat currency payment.

Both CUBER and Cuber Wallet are built on top of open colored coins technological standard and at the moment use the bitcoin blockchain as a database.

“The potential of CUBER is huge – think telecommunication industry developments last 20 years,” said Rain Lõhmus, CEO of Cuber Technology. “How many new cool applications we are daily using have come out from Development Departments of telecom companies. No, they are coming from startups. This is possible due to the widespread usage of decentralized TCP/IP protocols. We hope CUBER can do something similar to financial industry – liberate innovation from organizational borders, truly decentralize it. And true innovation in financial sector will flourish.”

“Our partnership with LHV Bank and the product Cuber is a milestone,” notes the Chromaway website. “[It] is the first time an established financial [institution] issues assets on the blockchain.”

The post Nasdaq, LHV Bank, Technology Startups Develop Blockchain-Based Fintech Applications in Estonia appeared first on Bitcoin Magazine.

 A few days ago a $400 charge hit my credit card and Amazon notified me that my 21.co bitcoin computer was on its way. Essentially a Raspberry Pi connected with a custom bitcoin-mining ASIC and a heatsink, the computer is one of the most interesting MVPs in modern memory. While you could easily recreate it yourself, the fact that 21 is building and selling these for a few hundred dollars is… Read More

On January 3, 2009, the Genesis block, or the first block in the Bitcoin blockchain, was created. In the coinbase parameter, there was a simple message: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” From that one block, Bitcoin was born.

Bitcoin has come a long way from that initial statement by Bitcoin’s pseudonymous founder, Satoshi Nakamoto. The technology is growing up and changing from its early days as a project adopted by impassioned technologists and libertarians to a technology widely researched and used by financial institutions worldwide.

Bitcoin had a rough road ahead of it, as did many early technologies including the Internet. It dealt with newspaper headlines lambasting Bitcoin because of its connection to Silk Road and drugs. Early adopters suffered millions of dollars in losses when early exchange Mt.Gox imploded. “Bitcoin is Dead,” many prophesied.

And yet, as Bitcoin approaches its seventh birthday, we see things changing. It is turning into that curious, wide-eyed technology with ideas as widespread as any normal 7-year-old. Cross-border payments, machine-to-machine transactions, smart contracts, microtransactions, and stock settlements all have been discussed and developed. Nothing is off limits; no question goes unasked.

From the early days of mining using a laptop computer, now bitcoin miners are setting up industrial-sized data centers with hundreds of thousands of high-powered, specialized machines. In January 2014, the Bitcoin network hashrate was only 10 million GH/s. Now it is 504 million GH/s. And as new mining machines are built and sold, the hashrate has continued to increase. During same time frame, there were around 50,000 bitcoin transactions daily. That measure of network utility has increased to about 170,000 bitcoin transactions daily.

A big part of this growth in transactions is linked to the growth in bitcoin-accepting merchants. In mid-2014, there were approximately 65,000 merchants who accepted bitcoin. By mid-year 2015, there were 100,000, which is a 50 percent increase. TigerDirect, a publicly-traded online electronics retailer, has seen incredible results. Of all the buyers that used bitcoin, 46 percent of them were brand new to TigerDirect. Further, orders placed with bitcoin were 30 percent bigger. In August 2015, BitPay, a bitcoin payment processor, recorded an all-time high of 70,000 bitcoin transactions. Bitcoin as a tool of transaction is growing.

Bitcoin as an asset class is also maturing. For the majority of 2015, the price has stayed relatively nonvolatile and constant, with the price fluctuating from $200 to $300. It’s only the past few weeks where the price has experienced such a significant increase, reminiscent of the early years. From January 1, 2013 to January 1, 2014, the price went from $13.41 to $808.05, going as high as $1,147.25 on December 4. Just one month earlier, on November 4, 2013, the price was $225.20. Even the “bubbles” in bitcoin are maturing. On the other hand, the market cap of bitcoin is down from an all-time high of nearly $14 billion to around $5 billion at time of writing.

Venture capital funding, however, continues to poor into the space. In 2013, bitcoin companies raised only $93.8 million. In 2014, firms raised $314.7 million. With another two months remaining in the current year, bitcoin and blockchain companies have raised more than $1 billion.

Regulations are also changing. Before, there were politicians decrying bitcoin because of its use on the underground marketplace Silk Road. Now, organizations such as Coin Center and the Chamber of Digital Commerce work to help these politicians and regulators draft rules that will ensure Bitcoin can continue to grow worldwide. New York has led the regulatory charge with its recent BitLicense. The European Union also recently ruled that Bitcoin was not subject to VAT, giving significant clarity for those participating in the ecosystem.

Finally, the next stage of blockchain companies continues to grow. Augur, a decentralized prediction market, announced that it had raised $5.1 million in a crowdsale. Ethereum, the smart contract and publishing platform, raised $18.4 million in its own crowdsale. It is expected that OpenBazaar, the completely decentralized peer-to-peer ecommerce site will launch in the coming months.

In the graphic below, many of the top Bitcoin leaders talk about the growth of bitcoin and where it is going. Bitcoin is not just in the fringes anymore; it is everywhere. Whether it's miners or payment processors, wallets or developer tools, the reality is simple: Bitcoin is growing up. And its ambitions are as vast as the many great technologies that came before it.

Jacob Donnelly is a full-time product manager and freelance journalist covering stocks, business and bitcoin. He runs a weekly digital currency and blockchain newsletter called Crypto Brief.

The post Bitcoin Is Growing up - an Infographic of the Bitcoin Ecosystem appeared first on Bitcoin Magazine.

The former operator of bitcoin exchange Coin.mx, Anthony Murgio, has pleaded not guilty to money laundering, Bloomberg reports.

As quickly as bitcoin price had dropped below it, the $330 level has been reclaimed and is currently supporting an unsure sideways price pattern. The outlook turns cautiously optimistic, but we see from similar price action, during September, that at least one more drop lower could happen before any return to advance. This analysis is provided by xbt.social with a 3-hour delay. Read the full analysis here. Not a member? Join now and receive a $29 discount using the code CCN29. Bitcoin Price Analysis Time of analysis: 14h24 UTC BTCC 4-Hour Chart From the analysis pages of xbt.social, earlier today: […]

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The utility settlement coin developed by Switzerland-based UBS in partnership with Clearmatics Technologies has gained its first round of funding thanks to UK-based Clearmatics. The initiative to link real-world fiat currencies with central bank accounts through a ‘settlement coin’ gained traction after Clearmatics completed its first round of funding. The blockchain-based settlement coin, dubbed ‘digital coin’ is seen as a means to help establish the block chain in global finance and change the global payment system. As reported by Bloomberg, investors include Nyca Partners, Route 66 Ventures LLC and Tellurian Capital Management, among others. Clearmatics founder and CEO Robert Sams […]

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Fidelity Charitable, the public charity associated with US mutual fund giant Fidelity Investments, is now accepting bitcoin donations.

With the central bank of all central banks approaching a rate lift-off, the US dollar is rearing to spring into a multi-year rally. Meanwhile, central banks in Europe, China and Japan continue devaluing their currencies in a last ditch attempt to spur inflation before the inevitable rates hike constricts global credit. Today's GEO considers economic conditions in Japan and takes a look at the US dollar chart. This post is powered by the Bitcoin Trading Network xbt.social - CCN29 and get 29USD off! Economic Indicators World Indexes and Forex Rates   Commodities In the Calendar This Week Sun 15 November […]

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Following recent reports wherein the Taiwanese Financial Supervisory Commission (FSC) Chairman deemed Bitcoin deemed bitcoin illegal, the FSC and the country’s central bank now vide the cryptocurrency as a commodity. The two authorities will also step back from trying to manage bitcoin transactions. The stance is certain to be met with relief among Taiwanese bitcoin adopters. The chairman of the Taiwan’s FSC, Tseng Ming-Chung has today confirmed that the regulator and Taiwan’s central bank now see Bitcoin as a commodity while noting that the two agencies will refrain from trying to regulate or manage bitcoin adoption in the country. As […]

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The Economist's Big Mac Index is a financial instrument almost thirty years old, built on the theory of the Purchasing Power Parity. PPP essentially means that, over time, currency exchange rates should equalize such that identical goods cost roughly the same in any two countries. It is used to measure the value of currencies in that if more of a currency is required in one country than another to get the same thing, the local currency is undervalued by a certain percentage. The Big Mac Index uses a McDonald's Big Mac as its measuring stick. It currently allows for the […]

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Several prominent exchanges, trading firms and banks have come together to set up a blockchain-based settlement group that could significantly transition the current securities market in the way of settling securities trades. A group comprising of the London Stock Exchange, UBS, the CME Group, Societe Generale, LCH.Clearnet and Euroclear have formed an initiative to look into the possibilities of bringing blockchain technology to securities trading. As reported by the Financial News, sources familiar with the group have confirmed three meetings that have already taken place in recent months. A steering committee has also been formed to help with the process, […]

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Anthony Murgio, a Florida man charged with operating an illegal bitcoin exchange owned by the ringleader of a group of hackers that are accused of stealing millions of dollars from major banks, pleaded not guilty to money laundering in a Manhattan court room Tuesday, according to Bloomberg. Murgio also pleaded not guilty to running an illegal bitcoin exchange, wire fraud and conspiracy. U.S. District Judge Alison Nathan set an Oct. 31 trial date for Murgio, who remains free on bond. Also read: Coin.mx operators also JP Morgan Chase hackers? Coin.mx Connection To Massive Bank Hack Murgio was not charged as […]

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