Are Bitcoin’s Lack of Privacy Features a Problem?

Bitcoin has proven to be the first viable digital currency that has brought along with it the innovation of blockchain technology as we know it today. It has demonstrated that individuals can in fact transact with one another in a peer-to-peer fashion without the aid of a middleman. However, despite its tremendous success, the issue of privacy has reared its head as a stubborn problem time and time again. This issue further compounds when the problem of fungibility is also considered.

The Link Between Privacy and Fungibility

Upon release, Bitcoin was touted as a truly anonymous currency because first and last names had now been replaced by public addresses. However, it is clear that public addresses are not enough in offering users true anonymity because a link between a public address and real-life user can still be made. Such a link is made even easier to establish when the transaction history of a public address is open for everyone to see on the blockchain. Thus, at best, Bitcoin is a pseudonymous currency that offers a band-aid solution to the mammoth issue of transactional privacy.

Bitcoin’s struggles on privacy precipitate another issue, namely that of fungibility. Fungibility simply means that one unit of a good or is interchangeable for another unit. For example, the British pound is said to be fungible as it can be exchanged with another British pound without loss of value.

This, however, is not the same for the Bitcoin protocol. Because Bitcoin’s UTXO set allows its currency to be tracked using a block explorer, if any bitcoins were ever used for, or gained by, illicit activity, they may be labelled as “tainted”. Merchants may refuse to accept these tainted bitcoins, therefore making them less valuable when compared to other bitcoins. A simple example would be that of a hack.

If a bad actor managed to infiltrate a cryptocurrency exchange and send all the bitcoins on that exchange to his or her own personal wallet, all this activity would be publicly viewable on the blockchain. Therefore, when the bad actor attempts to purchase a good or service from a merchant using the stolen bitcoins, or even try to convert those bitcoins to fiat currency, the bitcoins would rightly be refused. Hence, those bitcoins are said to be tainted.

This discrepancy in the value of bitcoins could potentially have a negative impact on its price as the market may start to view it as closer in value to that of the stolen bitcoins as opposed to its true value.

The Solution: Monero, Dash & Zcash

The privacy issue of Bitcoin then begs the question: “What then is the solution?”. It appears the answer may lie in a cryptocurrency which places privacy at the front and centre of its mission.

Monero – Perhaps the most well-known privacy cryptocurrency, Monero is a project that utilises several technologies in order to provide its users with an increased level of transactional privacy. Those technologies include: stealth addresses, ring confidential transactions (RingCT) and ring signatures. For example, Ringt CT works by hiding the value of funds that are being transacted on the blockchain using a cryptographic proof. The net result of the Monero’s efforts is a cryptocurrency that provides users with true anonymity.

Dash – Perhaps surprising to some, Dash is another currency that offers advance privacy features. Through its PrivateSend function, users can mix funds with others on the network, therefore making it difficult for a third party to determine where the funds actually came from. The masternodes that operate on the Dash network conduct the coin mixing process.

Zcash – Founded by Zoko Wilcox, Zcash is another digital currency that offers a serious privacy solution in the form of zk-SNARKs. zk-SNARKs work by encrypting transaction data and then verifying that the transaction data is accurate without having to reveal any information. Such a technological is quickly proving to be a viable solution to the privacy issue.


To conclude, the Bitcoin protocol has proven to be one of the greatest technological innovations of the 21st century. However, in a world with increasing surveillance and a desire by the public for increased privacy, it fails to offer a valid solution.

The problem of privacy precipitates even more issues, namely that of fungibility. If Bitcoin is to ever become the peer-to-peer digital cash system set out in its whitepaper by Satoshi Nakamoto, it must make an attempt to at least solve these issues.

Other, more privacy-focused cryptocurrencies, such as: Monero, Dash and Zcash are leading the way in providing users with an increased level of transactional privacy. Novel technologies such as ring confidential transactions, the PrivateSend function and zk-SNARKs are proving to be serious solutions to a very serious problem.   

Because of the issues these currencies set out to solve, perhaps they will be the digital currency of choice for many users when it comes to transacting. We will have to wait and see.

Author: Bisola Asolo


Please enter your comment!
Please enter your name here

Must Read