Do VPNs make cryptocurrency more secure?

18 September, 2019

Being new to the whole cryptocurrency thing, you are trying to learn as much as possible. Someone told you that you should use a virtual private network (VPN) for conducting all cryptocurrency transactions online. That is good advice. But do you know why? A lot of people wonder if VPNs make cryptocurrency more secure. Keep reading to learn the answer.

The VPN concept is completely separate from cryptocurrency and blockchain. In order to know how it can affect cryptocurrency transactions, you have to understand both the function and purpose of a VPN. It turns out that you're in luck. This post will tell you everything you need to know about VPNs and cryptocurrency security.

Let us start with the understanding that cryptocurrency is appealing to some people because it allows for anonymous financial transactions in a secure environment. The way security is maintained differs from one crypto platform to the next. It is completely unaffected by your choice of networks so, in that sense, the VPN doesn't make cryptocurrency more secure.

Defining the VPN

So, what is a virtual private network? It is a computer network that achieves privacy through a variety of strategies including hiding IP addresses and rerouting traffic. The biggest advantage of a VPN is that it does not allow the websites you visit to track you.

Every time you go online, your internet service provider (ISP) is able to track all of your activity. Their computers will track every website you visit. They might also track how long you spend on each website and how often you pay repeat visits. That's bad enough, but it's just the start.

Nearly all the websites you visit are also tracking your behavior. They deposit cookies on your computer to allow them to embed their own data and use your browser to track your activity. Just like your ISP, the companies behind those websites can find out where online you've gone.

A VPN changes all that. Accessing the internet through a VPN brings any and all tracking to an immediate halt. If it helps, think of a VPN as being like a mask that keeps your identity secret.

Routing traffic through a VPN

A VPN achieves its privacy goals by routing internet traffic through it. If you were to access the internet through a VPN, you would be telling your computer to establish a connection with the VPN rather than your ISP. This doesn't keep your ISP provider out of the equation entirely given that you still need it to access the VPN. But here's what it does: it prevents your ISP from tracking any activity except your connection to the VPN.

Your ISP can see that you have logged on to the VPN. It can track how long you stay connected. It can track when you log off. But that's it. Your ISP cannot see anything else you are doing online.

Once connected to the VPN, it accesses all of the websites you want to visit. It then routes the traffic through its own servers. In essence, the VPN acts like a middleman. It contacts a website for you and then waits for the response. When that response comes, the VPN forwards it to your browser.

Just like your ISP, website trackers can only see the VPN's IP address. The website's server has no idea where you are, what your IP address is, or anything else. It also cannot track where you go online. Accessing the internet through a VPN allows you to move around online in complete stealth.

VPNs and cryptocurrency transactions

Hopefully you now understand the benefit of using a VPN. Now let us talk about VPNs and cryptocurrency transactions. All of the same principles still apply. Accessing a cryptocurrency network through a VPN only allows that network to see VPN information.

You could use your VPN to log on to an exchange where you can buy and sell all of your favorite cryptocurrencies. You could transact business all day with the confidence that your IP address and network activity is hidden. The exchange will not know anything about you; your ISP provider will not know you have been on the exchange.

Does this make your cryptocurrency transactions more secure? No, it only makes them more private. All a VPN does is stop others from snooping on your internet activity. A VPN more or less cloaks your computer as you move around online.

As for your cryptocurrency transactions, they occur separate from the VPN. They occur on the exchange's network and the various networks of the cryptos you are trading. All of that activity occurs separate from your VPN.

How cryptocurrencies are secured

If you do not quite understand what all this means, don't panic. These sorts of things can be difficult to grasp. In light of that, let's talk about how cryptocurrencies are kept secure. What you read in this section applies irrespective of whether or not you use a VPN to get online.

Cryptocurrencies maintain security through a number of key strategies. The first strategy is anonymity. In theory, all of the information pertaining to a cryptocurrency transaction is protected so that no one else can see it. Thus, the identities of the people involved remain anonymous.

We say this is theoretical for the simple reason that true anonymity does not really exist in the cryptocurrency world. The platform that gets closest to true anonymity is Monero. On the Monero network, transaction data is kept completely separate from ID data. That makes it much harder to link transactions to the people behind them.

Bitcoin does not offer true anonymity. Rather, it offers what is known as pseudonymity. Under their model, identifying information is included with every transaction processed on the network. Even if the only thing identifying you is your e-mail address, that information is included when transaction data goes out to be validated.

Bitcoin protects that information by encrypting it. It can only be decrypted by computer nodes that have access to the appropriate private keys. This is how pseudonymity is achieved. Your e-mail address is not completely anonymous because it can still be uncovered by anyone who has the keys but the likelihood of those keys being discovered is not very great. So for all intents and purposes, you remain anonymous.

Consensus algorithms

Another strategy used to secure cryptocurrencies are what are known as consensus algorithms. These are algorithms built in to the code that force coin miners to prove their legitimacy prior to being allowed to validate new blocks in the chain. Consensus algorithms are a lot like software applications that require multi-stage authentication.

The Bitcoin network relies on a proof-of-work algorithm. This algorithm forces the computer nodes coin miners to process transactions to do a certain kind of work. That work involves gathering information from cryptocurrency transactions and using it to solve a mathematical equation. There is only one correct answer, so a computer node that returns the wrong answer would be considered invalid.

This simple consensus algorithm makes it nearly impossible for someone to hack the Bitcoin ledger and change its data. It also prevents one or two nodes from gaining complete control over the ledger. In this way, both the ledger and the coins already in circulation are protected.

There are a number of other consensus algorithms including proof-of-capacity, proof-of-stake, and proof-of-authority. All of them serve the same purpose: validating the authenticity of network nodes before allowing those nodes to validate new blocks in the chain.

Irrevocable records

Bitcoin's developer built one more feature into his code to ensure security. That feature is irrevocability. In other words, cryptocurrency transactions validated and added to the Bitcoin ledger cannot be revoked. They also cannot be modified. A record becomes permanent once it has been added to the chain.

How does this enhance security? By preventing someone from going into Bitcoin's ledger and changing the data. If you cannot change the data, it is nearly impossible to steal coins. The one downside here is that it does not allow for certain kinds of transactions, like refunds for example.

Let's say you wanted to use Bitcoin to make a deposit at an online casino. Before you played your first game, you changed your mind and wanted your money back. The casino could not simply reverse the deposit like they could on a credit card. Instead, they have to create an entirely new transaction that pushes coin from their wallet to yours.

This is not such a big deal from a practical standpoint. But from a security standpoint, it is huge. Not being able to reverse transactions eliminates an entire avenue of fraud. It also creates an electronic paper trail of sorts which only serves to make transactions even more secure.

In summary

To summarize our entire discussion, a VPN does not make cryptocurrency any more secure. The properties that make cryptocurrency secure are unique to cryptocurrency itself. Meanwhile, the strategies employed to keep it secure are executed separate from the network users rely on to access their cryptocurrency.

Yes, a VPN makes your online movements more private. And yes, a VPN could prevent snooping eyes from knowing that you are buying and selling coins. But the VPN is separate from cryptocurrency networks. It cannot make cryptocurrency itself more secure.