Bitcoin Mixers: Why They Are Used and How Do They Work?
The Bitcoin blockchain is open to the public, allowing anyone to access it and search for records on the total transactions for bitcoin that have been processed since the cryptocurrency was launched. Most people believe that it's one of the best things, but others may find it an issue. However, if you're looking for anonymity while making Bitcoin transactions, the Bitcoin blockchain's public nature can make it harder for you to hide your identity.
Several Bitcoin traders have gone to extreme lengths to ensure their bitcoin transactions remain private and can't be traced back to them. One of the best ways to do that is through a Bitcoin mixer, also called a Tumbler. Using a Tumbler or Bitcoin mixer is combining all the Bitcoins into separate sections and then splitting them when transferring to the recipient.
Mixing involves shuffling your bitcoins, making it difficult for anyone looking at the Bitcoin blockchain to pinpoint who is making the transaction and for how much.
For example, suppose a crypto trader sends 15 Bitcoins to another trader. In that case, it will show on the public explorer that the crypto trader is sending some Bitcoins (not the exact number) into a mixer, along with several other people, and that the other trader received some Bitcoins (not the exact number) along with the rest.
It's an excellent way to hide your transaction, as no one will be able to find out exactly how much Bitcoin you are trading since the numbers will be hidden from view because of the Bitcoin mixer. However, it's not all good news because you can face plenty of problems using a Bitcoin mixer.
Why Shouldn't I Use a Bitcoin Mixer?
Bitcoin mixers may be an excellent tool for crypto traders involved in shady deals so that they can hide their transactions, but plenty of things raise red flags with mixers. For example, you won't know how much Bitcoin was sent by the trader into the mixer, and if law enforcement authorities know where the trader lives and that a trade was only between two traders, it's easier for them to connect the dots and find the money trail.
Therefore, if you must use a Bitcoin mixer, it's better to involve other traders in the mix because if there are hundreds of traders using the mixer, it becomes harder to track and trace them. In addition, some Crypto exchanges won't accept bitcoins that have been traded with a mixer to leave or enter their exchange.
Crypto exchanges know when mixers are being used, and any mixed Bitcoin is labeled 'tainted' by them. So, for example, Wasabi, a bitcoin wallet that hides your identity, has been blocked by Binance from making any withdrawals. Some of the other Bitcoin mixers that crypto traders commonly use are JoinMarket and Samourai.
Even though Bitcoin mixers offer you the privacy you want when trading Bitcoin, you will experience fungibility issues. So, if you're using a bitcoin mixer, you must be prepared that your Bitcoins will be labeled 'tainted' by the exchange, and many of them may refuse to accept them, which can become a big problem for you.
It would be best to keep in mind that not every Bitcoin mixer is legal, and most of them aren't effective at hiding your financial transactions. Therefore, it's always best to do some research before using a Bitcoin mixer, as there could be several issues you would have to deal with before your transaction is complete.
Is It Illegal to Use a Bitcoin Mixer?
One of the main issues with Bitcoin mixers is that since they can hide the financial transaction and can't see the number of Bitcoins being traded, it's the best tool you can use for money laundering. As a result, bitcoin mixers have attracted interest from criminals, tax evaders, and anyone else involved in illegal activities due to the anonymity offered by them.
Whether you can be charged for using a Bitcoin mixer will depend on where you live, as each state has its laws. Still, it's best to avoid them because using Bitcoin mixers to hide your Bitcoin transactions has been labeled a crime by the U.S. Deputy Assistant Attorney General. The authorities have also arrested several people using bitcoin mixers for money laundering.
There are also new rules focused on anti-money launderings, such as the AMLD-5 Directive of the European Union and the 'travel rule' of the Financial Action Task Force. These are designed to make it tougher to launder money and make it harder for people entering the cryptocurrency trading industry to use Bitcoin mixers for hiding their transactions.
Alternatives for Bitcoin Mixers
Instead of a Bitcoin mixer, most traders have started using other alternatives because you can hide your bitcoin transactions and money flow through different tools. In most hacks, the criminal will often transfer the funds via multiple exchanges and use fake accounts that have been bought cheaply. They can also use stolen identities for this purpose, called chain-hopping.
It's an effective method for criminals because law enforcement authorities can take several days to shut down these accounts at crypto exchanges. But unfortunately, it's also more complicated for these exchanges to identify any suspicious accounts in their exchange once they have passed all the KYC (know-your-customer) processes.
The advocates of privacy have come out to support privacy tools like Bitcoin mixers, claiming that they take away the government's power to look into your financial transactions and declare that traders use Bitcoin mixers and not only criminals.
Now that you know everything about Bitcoin mixers and why they are used, you can use them to maintain your anonymity or privacy when making Bitcoin transactions. First, however, ensure that you read up on local laws and the rules of exchanges regarding Bitcoin mixers before using them.