There are 2 different Tor connections to consider when running a Bitcoin node.
1. Connecting to other nodes
The first is the connection your node makes with other nodes. This will hide your home router’s IP address to other nodes. Your IP address is linked to your ID via the KYC info that your Internet Service Provider collected.
I’ve turned my VPN on and I’m connecting to the internet via Brazil. This website shows where my IP address seems to be and can be used to search any IP address:
Your IP address can also be searched by anyone in the world, revealing your approximate location. Perhaps with more sophisticated tools than a simple search (none I know of to explain) a more precise positioning may be obtained.
Why is this important? Because you don’t want attackers to know you have enough Bitcoin to warrant running a node, and who/where you are. Also, if you have a Lightning Node, your channel liquidity is public knowledge. Even though all the sats might be inbound, and not owned by you, an attacker may gain an approximation of how much bitcoin is on your Lightning Node, and from that, can guess how much is in your cold storage, helping them decide if you are a worthwhile target. So, run the node over Tor, and hide who you are and where you are.
2. Connecting your Bitcoin Wallet.
The second Tor connection to think about is the connection between your node and your Bitcoin wallet on your computer. This connection is already very private. It’s two devices on your home network communicating, that are not accessible from the outside world. (The home network is not impossible to hack, so keep your router security high – firewall, good password, don’t open ports).
Your router will allocate IP addresses to each of the devices that connect to it. (You can look them up on your router’s login page). These IP addresses are INTERNAL, so they can’t be accessed by devices over the internet – they must be connected to your home router.
Your wallet needs to have the IP address of the node, and then the two devices can talk. But what if you left home with your computer and wallet? The IP address won’t work because you’ve left the home network. This is where Tor comes in. It can be used to connect your wallet to the node FROM ANYWHERE IN THE WORLD.
The node has a Tor onion address, which the wallet must know, and then the 2 devices can talk. Here the Tor connection is not helping with privacy per se, it is helping external-to-home-network communication.
If you share the onion address with friends or family, they can connect to your node (not too many people or the little Raspberry-Pi-that-could, won’t cope).
You can then be the Uncle Jim of your clan.