Your non-custodial wallet is likely making your Bitcoin less private.
Here is what you should know
▶️ Bitcoin blockchain lacks strong privacy but at the same time, it’s not public either.
You should know that the privacy aspects of your Bitcoin to a large extent depend on the wallet itself. A poorly designed non-custodial wallet will leak your data!
▶️ If you have purchased a hardware non-custodial wallet then chances are the seller has your delivery address which may be leaked as a result of the hack. This happened before and is likely to happen in the future. Keep that in mind when shopping for one.
▶️ There are many non-custodial wallets but only a few able to maintain the privacy of your Bitcoin. A good wallet should be able to display your Bitcoin balance/transactions without the need to communicate to some centrally managed server. Such wallets are known as SPV wallets.
▶️ Easy way to check if the wallet has such capability is to use its import feature & see how long it takes to restore Bitcoin balance & transactions. If it does so in less than 5 mins then a high chance wallet is not SPV and potentially knows your balance & past/future transactions.
▶️ No, if that wallet provider happens to log that data along with the IP address then users are even more at risk because if someone hacks that then this can potentially expose not just the user’s balance but also a physical location.
▶️ Few non-custodial wallets are SPV because creating them is substantially more difficult. An SPV wallet will function even if the entity behind the wallet no longer exists. A non-SPV wallet will not be able to display transactions/balances if the entity making it shuts down.
▶️ Another point to know is how whether the wallet has the capability to provide a new address for every incoming transaction. Fortunately, most wallets are able to do this.
This allows breaking the link between different incoming/outgoing transactions within the same wallet.
▶️ A related but different point is the logic a wallet app uses to construct transactions. If it’s not implemented correctly then connecting different transactions to the same wallet becomes much easier, especially if done by an algorithm. Most wallets lack that capability.
▶️ The final point is not related to wallets but the way you obtain Bitcoin. If you buy Bitcoin from the exchange then keep in mind that the exchange knows your balance, (partially transactions) as well as your IP/location. Unfortunately, there is no easy way to escape that.
▶️ That was a mid-level overview of the privacy aspects to keep in mind. It’s not complete but for the average user should be sufficient. More to come.
Stay safe and private!
