NEW YORK (InsideBitcoins) — The “anonymity” associated with bitcoin seems to be one of the most captivating aspects of the digital currency for the general public, but the reality is that these transactions are not private by default. Bitcoin transactions are pseudonymous, which means there is still some sort of digital ID used in transactions.
The reason that bitcoin can be used for relatively private commerce is that an onlooker doesn’t necessarily know the true identity behind the sender or recipient of any transaction on bitcoin’s public ledger. Certain bitcoin projects, such as Dark Wallet and zerocash, could enhance transaction privacy further in the near future, but there are already a large number of people using the cryptocurrency for that purpose right now. Here are five of the most common situations where bitcoin is used to enhance privacy in online transactions today.
Illegal goods and services
The earliest and perhaps most-widely reported use case for bitcoin was Silk Road. This online drug marketplace propelled bitcoin to mainstream popularity with the infamous Gawker article in 2011, and its legacy will last far beyond its shutdown in late 2013.
If someone wishes to sell drugs or other illegal goods over the Internet, then technologies such as Tor, PGP, and bitcoin are the most practical options. In the future, these sorts of marketplaces could include anyone from a drug dealer to a merchant who simply wishes to avoid an online sales tax.
Illegal or controversial donations
Another one of the early uses for bitcoin was as a vehicle for Wikileaks donations. Certain members of Congress had pressured MasterCard, PayPal, and others to block donations to Wikileaks, which prompted the online platform for whistleblowers to accept censorship-resistant donations via bitcoin. Cryptocurrency allows everyone to send any amount of money to anyone else in the world, which means illegal or controversial organizations cannot be starved of donations for political reasons.
There’s also the problem of transactions that some individuals would simply like to remain private. Customers of various adult entertainment companies may not want their purchasing history to be displayed on their credit card statements. Some adult performers have gone as far as to embrace the digital currency as part of their overall sales pitch. Online gambling is another popular venue for bitcoin payments, where a user may not wish to share their habit with others.
Although we recently learned that VPNs may not be all they’re cracked up to be, there are plenty of VPN services that are already accepting bitcoin as a payment option for their subscription packages. Users of these services have an incentive to give the VPN provider as little information about them as possible, which means bitcoin is preferred over credit cards or PayPal. One VPN provider, Private Internet Access, was part of Bitcoin World at the Consumer Electronic Show this year.
Hackers and valuable data
Bitcoin is not the only kind of data that can be valuable in the right (or wrong) hands. As we saw with The Fappening, hackers were willing to share stolen photos of celebrities for the right price. In the case of CryptoLocker, targeted users are forced to make a bitcoin payment to hackers before they’ll be able to access the valuable files on their computer.
Although there are many different applications in development based on bitcoin as a technology, the fact that it’s a pseudonymous, digital cash system provides a large amount of value on its own. Bitcoin has created a low-trust environment where the buyer or seller of certain goods or services does not need to know any identifying information — other than a bitcoin address — about the other party.