Your past privacy leaks can't be undone because of the nature of the blockchain. However, you may protect your future transactions.
In this tutorial, we will use Monero as an intermediary to "unlink" your past Bitcoin history from the future one.
Monero is a fully anonymous cryptocurrency that uses proven crypto techniques to hide your financial life. It uses features such as Ring CT (confidential transactions) and stealth addresses to make impossible for anyone to trace your transactions on the blockchain.
Using Monero to "clear" Bitcoin history may be a difference between the freedom and the life in prison.
Let's consider the following scenario to understand the implications of financial privacy:
For years, you've been transacting carelessly, exposing your Bitcoin addresses to the public, possibly linking it to your real identity.
One day the government decides that certain transactions you've made are "sketchy" and they will use Taint analysis to track down all your financial history.
Let's say you bought marijuana from a local dealer spending one of the tainted outputs. Proving that you indeed did buy it will be very easy once they force you to give up your private keys under the threat of violence.
Using the private keys, they can sign those "sketchy" transactions and with some other evidence prove that you indeed are who they think you are.
Now imagine that before buying the marijuana you'd "erase" your Bitcoin history using Monero and then buy entirely new bitcoins not linked in any way to your real identity.
In a likely case of the government forcing you to give up your new private keys, its corresponding outputs wouldn't match the tainted ones. Thus making it impossible for them to know about the transaction with the dealer.
I hope you understand the importance of online privacy now?
Let's move on to the tutorial itself.
For the purpose of this post, we will use Monero GUI Beta and Electrum. You may however use other software.
Before we start with the process, let's hide our identity first.
I use a paid VPN called Trust.Zone.
It offers a needed privacy and broad range of IP addresses across numerous countries.
In case you don't feel like paying for a VPN just connect via Tor.
Sell bitcoins, Buy monero
Visit ShapeShift and choose Deposit and Receive assets - in our case Bitcoin and Monero.
Click Continue to go to the next step.
Open your Monero wallet, select Receive tab from the sidebar and copy an Integrated address.
Paste it to Your Monero Address field. Also, copy & paste your Bitcoin Refund Address.
Agree to the terms and click Start Transaction.
Make a bitcoin payment to a provided deposit address.
You can either scan the QR code with your mobile wallet or copy & paste the address to your PC/hardware wallet.
The amount needs to be within the provided limits. If you need to send higher amounts, choose the Precise option in the very first step instead.
Wait for the network confirmation which usually takes around 10 minutes.
After your transaction is confirmed, ShapeShift will try to match your demand with someone else's supply.
XMR transaction is then sent to your wallet.
Monero confirmation time is 2 minutes, but because of privacy reasons (AFAIK), your new coins can't be used before ten confirmations (correct me if I'm wrong).
After this time the coins are visible in Unlocked balance and are available for spending.
Sell monero, Buy back bitcoins
ShapeShift sent monero coins to our wallet using Ring CT. It means that no amounts and inputs/outputs are visible on the "public" blockchain.
In other words, this transaction is untraceable.
Only ShapeShift knows this transaction has happened, but they can't see where the money will end up in the future. Unless of course, we send it right back to them.
If the period between those two transactions isn't long enough (at least a week), they could use their internal logs and do a time analysis to guess the origin of the funds.
Knowing this, we'll choose a different exchange service to break this link.
In case you're connected via VPN, select a different country to get a new IP address. It isn't necessary, but it certainly adds little more security through obscurity.
Visit XMR.TO and create a new order.
Note: you may also access the site via TOR: xmrto2bturnore26.onion. Thanks Jeremie Dubois-Lacoste for pointing that out.
Paste an unused Bitcoin address and type in your desired amount. You will be sent the amount to this address later.
In the next step, you will be shown the order summary.
Scroll down to How to pay? section.
Copy & paste the information to the corresponding fields in Send section of your Monero wallet.
To take advantage of the Ring CT feature fully slide the Privacy level to the right.
Such transaction is a bit more expensive (in my case around $0.25) but it will become untraceable.
Click SEND and go back to the XMR.TO website.
XMR.TO needs 1 network confirmation (approximately 2 minutes) to send you bitcoins.
You will receive entirely new bitcoins unrelated to your past transaction history. It means more privacy for any future Bitcoin transactions.
I believe voluntary transactions between two parties should be free from any government interference. Politicians ignore this notion and demand access to everyone's financial life under threat of violence.
Monero as a truly anonymous cryptocurrency solves this issue and allows people to transact freely without fear of persecution.
We can also take advantage of these privacy features with Bitcoin and "unlink" past transaction history from our real identity. This makes Monero a powerful privacy tool way beyond its intended use.
Please let me know in the comments section below what you think about this alternative use case of Monero.
P.S. I'm thinking of creating an app that would automate all of the above tasks. Let me know what you think about this idea.