BITCOIN IS THE first uncensorable digital currency: When it moves between buyers and sellers, there's nothing anyone can do to stop it. The now-shuttered online marketplace Silk Road couldn't have existed before bitcoin, because it's unfathomable that Visa, Mastercard, or PayPal would approve transactions on an e-commerce site for buying and selling illicit drugs.
Bitcoin is often mistakenly described as a "fully anonymous" cryptocurrency. In fact, while global superpowers can't prevent you from spending your bitcoins, that doesn't mean they can't figure out what you bought. More than 100 Silk Road users have gotten into trouble with law enforcement since 2012, and the Snowden leaks revealed that the National Security Agency has worked to uncover the identities of other bitcoin users as well.
Though you don't need to give up your real name to use bitcoin, transaction histories are fully visible in an online ledger called the "blockchain." Skilled digital forensics investigators can link your real identity to a bitcoin address by extracting information from pervasive "web trackers." These are hidden programs installed on your computer that capture information about your browsing and purchasing habits. Trackers, which are used by Facebook, Google, the FBI, and all sorts of malicious actors, can also record an IP address, the numeric code that identifies a home internet network. "Anonymity is misrepresented in popular culture... it's not an absolute," cryptocurrency researcher and security consultant Kristov Atlas writes in his self-published 2014 book Anonymous Bitcoin, a practical guide to concealing your identity. "The question at any given time is not, Am I anonymous?' but rather, 'How anonymous am I, and to whom?'"
There's no such thing as perfect anonymity, but a handful of best practices can go a long way toward shielding your transactions from government spies and other malevolents.
STEP 1: HOLD YOUR OWN BITCOINS
DON'T KEEP YOUR bitcoins on a custodial exchange such as Coinbase. These sites store your identity and may share it with law enforcement agencies, making transactions about as private as mailing a personal check with a return address. Instead, set up a bitcoin "wallet"--a software application that enables you to send or receive bitcoins in a peer-to-peer fashion, directly from your own computer. With a wallet, the secret codes required to spend bitcoins aren't stored by a third-party company or somewhere in the cloud. You...