4 Reasons Why Bitcoin Address Reuse Is Dangerous

The blockchain is a wonderful tool for analysts, accounting geeks and researchers of all sorts. It shows us exactly where all the money goes and where it is at any given time since the inception of Bitcoin. This is why Bitcoin address reuse is so dangerous.

All these transactions are associated to addresses, which many Bitcoin users reuse to the detriment of the people they transact with and themselves. 

It is Convenient to Reuse Bitcoin Addresses

There are enough Bitcoin users out there that reuse Bitcoin addresses because it seems like something convenient to do. Users might be tempted to use the same Bitcoin address more than once for the following reasons:

  • An address that already worked in the past, seems more trustworthy when time comes to deposit funds
  • Availability might also be an issue. Users can easily see which was the last address they used on almost any wallet or Bitcoin service
  • Users see it as a harmless thing to do. Especially if there has never been an outgoing transaction from that address

The truth is that no matter the reason, going the extra mile and getting a fresh address for each transaction is the only responsible way to use Bitcoin. 

Unforeseen Perils of Bitcoin Address Reuse

Even Satoshi warned us about the perils of Bitcoin address reuse. But since custodial wallets like exchanges became more popular and more people started using Bitcoin as an investment vehicle, we, as a community, might need to reiterate some of the fundamentals.

This is especially the case when Bitcoin onboarding goes through the exchanges. It is easy to open an exchange account, fund it, buy Bitcoin and start trading.

Bitcoin Address Reuse at Exchanges

The UX is so good there that users feel like their transition from fiat to Bitcoin is absolutely seamless. But Bitcoin doesn’t work like fiat. There is no one actively telling users this when they open an exchange account.

On the exchange, it is easy for users to rely on a single Bitcoin address for everything they do. After all, trading is the activity people are most interested in. Traders don’t necessarily see the dangers of using the same address.

Reason 1: Exchange Front Running

This leads us to the first reason not to use the same Bitcoin address. Repeated use of a Bitcoin address makes it easier to identify patterns of behavior associated with it.

If you are a trader, you should be using different addresses to make it more difficult for analysts to pick up on your trading patterns. 

If you don’t use new addresses on each transaction and you trade relatively large amounts, then you are encouraging front running:

  • Analysts know that you make certain transactions from that address when you buy or sell Bitcoin
  • They have the aggregate data of everyone who does the same
  • Therefore, they can preempt your move in the market with a move of their own

Reason 2: Bitcoin Address Reuse Reduces Privacy

With a certain degree of sophistication, analysts can eventually figure out the identities of the people operating through a given Bitcoin address. Reusing a Bitcoin address multiple times makes it easier for them to establish your identity.

If you use that address to transact with other people, those addresses that send you funds or the ones you send funds to, will be strongly related to you as well. 

The implications of that are that the people you trade with can be easily followed by authorities. You can also become entangled in investigations stemming from the suspected wrongdoing of others.

Would you Like Everyone to Know How Much Money you Have and How you Spend it?

Establishing a strong correlation between an address and your identity can also lead to other disadvantages:

  • People can see your spending patterns
  • Everyone will be able to know how much you make
  • Anyone could leverage this information

When everyone knows how much money you have and how you spend it, they can use the information to charge you more for certain services.

They can also see through association, where you spend, which will allow them to conspire against you.

Reason 3: Don’t Put All the Eggs in the Same Basket!

The corollary to this is that malicious actors might also get a hold of that information. Someone could kidnap a member of your family and demand ransom knowing exactly how much you hold.

This is also true when you accumulate a lot of Bitcoin in the same address even if you don’t spend it.

Bitcoin Address Reuse Before and After Spending

The previous example shows that although it could be worse to reuse the same Bitcoin address once you spent funds associated with it, Bitcoin address reuse even when none of the inputs has been spent, is bad as well. 

According to the logic of those who hoard coins on a single address, as long as they don’t spend any inputs associated with it, no one can reverse engineer the signature and get the private keys. This is true.

As long as there are no transactions signed from an address, the private keys are safe – provided that you abide by private key security protocols that allow you to keep them away from malicious actors. But hoarding on a single address becomes a vulnerability in itself. 

Reason 4: Losing your Private Keys 

Even if malicious actors are not out there to get you, refraining from reusing the same Bitcoin address to stow all your money away, might serve to protect you in case you lose the private keys.

If you can separate your funds in various wallets or addresses and you lose the keys to one of them, you only lose part of the funds.

Generating New Addresses for Every Transaction

Due to all the reasons stated above, you should never consider Bitcoin address reuse. It exposes your identity, violates your privacy and the privacy of those that transact with you. This practice also makes you vulnerable to a myriad of attacks. 

Therefore, you should always generate new addresses for every transaction. Wallets nowadays make it easy for you to do so with the same seed from where the private keys are generated.

If you can operate with multiple wallets, then that is even better. In any case, remember, the blockchain makes it easy for analysts to figure out transaction patterns.

Understand Bitcoin Conceptually!

That compels you to know how to behave in order to protect yourself and your interests. Reuse of Bitcoin addresses is just one of those instances in which you must understand the system and be smart about how you behave within it.