Bitcoin Core gives you increased security and privacy at a cost. You need to take responsibility for the security of your bitcoins, meet higher minimum system requirements, and beware of some possible problems.
Every confirmed Bitcoin transaction is published to the block chain where anyone can see it. So why do people still use Bitcoin? And why do many of them believe that Bitcoin is a private way of sending money?
One reason is that Bitcoin Core and some other Bitcoin software tries to avoid associating your real-world identity with the transactions you make. The difference looks like this:
The second type of transaction (a pseudonymous transaction) only provides practical privacy if nobody can figure out that “5a35b” is really Alice. It’s up to your wallet to prevent anyone from making that connection. See below for how Bitcoin Core’s privacy compares to other wallets.
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Third-party Bitcoin services can both increase and decrease your privacy. They can increase it by mixing your transactions with those of other users; they can decrease it by tracking your activity and directly associating it with your real name or other identifying information.
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Perfect Privacy for Received Transactions
There are 230 million transactions on the Bitcoin block chain. How do you find which ones pay you? Here are some common options:
Bitcoin Core downloads all 230 million transactions on the Bitcoin block chain and processes them to find which transactions pay you.
This currently takes about 4 hours the first time you start Bitcoin Core and about 5 minutes a day to keep updated, but it gives you what scientists call information-theoretic (perfect) privacy against eavesdroppers for received transactions.
Strong Privacy for Sent Transactions
To put a transaction on the block chain, you must send it publicly—but how you send it can make a big difference.n transactions on the Bitcoin block chain. How do you find which ones pay you? Here are some common options:
Can you guess who made which transactions? Nearly all peer-to-peer lightweight clients today make no attempt to obscure their sent transactions. They simply send them to some or all of their peers.
Bitcoin Core does much better. By default, it relays transactions for all of its peers—thousands of separate transactions a day under common conditions—which allows it both support the peer-to-peer network and confuse anti-privacy organizations that try to track your transactions.
The Tor anonymity network helps disassociate your online activity from your IP address (which is often closely associated with your real name). This significantly increases your ability to confound anti-privacy organizations.
Once you setup Tor, using it with Bitcoin Core is easy. If you also setup a Tor hidden service, you will be able to connect mobile clients to your Bitcoin Core full node for increased security and privacy wherever you go.
Decentralized Peer Discovery
The first time any Bitcoin program connects to the peer-to-peer network, it has to ask a centralized authority for a list of recommended peers.
Once the program gets on the network, it can ask its peers for more recommendations in a fully decentralized way—but most lightweight wallets don’t bother.
|P2P Lightweight Wallets|
|Asks the same centralized services every time program is restarted. This can be faster.|
|Uses the peer-to-peer network to independently discover new peers. Uses found peers on restart.|
This allows the centralized authority to connect lightweight wallets to dishonest peers that can completely destroy lightweight transaction privacy. Those dishonest peers can work with dishonest miners to weaken lightweight security too.
Bitcoin Core prefers decentralized peer discovery, so after the first time it starts, it no longer has to trust the centralized authority. Isn’t that worth occasionally starting up a few seconds slower?