What are Bitcoin mixers, and why do exchanges ban them?

One of the original allures of cryptocurrency is the narrative that using them provides the sender or recipient anonymously, but this is a common misconception within the sector.

In reality, Bitcoin (BTC) and many other cryptocurrencies are easily traceable.

Proof of this came earlier this week when on April 27, U.S. authorities arrested the mastermind of Bitcoin Fog, a darknet-based BTC mixing service. Authorities were able to capture the operator after analyzing ten years of blockchain data.

One doesn’t need to be a forensic analyst to know that every single transaction is tied up to addresses on the blockchain and that they will stay there forever. While government agencies cannot determine the IP address or personal data from the address, these coins usually end up being used for products or service payments. This is the trail that leads back to the sender and recipient.

In the case of Bitcoin Fog, law enforcement was able to identify server hosting expenses paid using digital currency. Bitcoin mixing services such as Bitcoin Fog allow users to mix their coins with other users, making it almost impossible to detect the destination addresses. This obfuscates the ties between the inputs and output addresses, providing a better level of privacy.

Example of a mixing transaction. Source: TarushTech-Medium

Mixing services are offered in a wide range of methods, including fully centralized solutions where trust is required, to Coinjoin mixers, which depend on a large group of users to self cooperate and act simultaneously. There’s even the possibility of trading on decentralized exchanges (DEX) to virtually eliminate any possible tracing.

Mixers do present a few risks

Centralized mixers offer the obvious single point of failure problem. Even if one trusts that the entity is using multisig addresses, if the service is willing to share its data or has been breached, their users will lose their privacy.

CoinJoin solved this problem by combining the inputs of multiple users…

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