Since the silk road got shut down Bitcoin is being watched by the feds NSA and FBI/interpol
From what I understand, BitCoin's privacy wasn't cracked. It was Silk Road's procedures (requiring users' coins to be held in Silk Road's account) which made it possible to identify coins through "clustering."
BitCoin isn't anonymous. However, it offers privacy if moderate steps are taken. For example, use different "wallets" for different types of purchases. This avoids the potential for "clustering" your music, Elvis photos and seed purchases which would allow someone who identifies you through a music purchase to relate you to other transactions within the same address or wallet.
Use an anonymous proxy like Tor to hide your real IP address from the transaction.
Use "change addresses" to split coin into new addresses, breaking "clustering" effect of history related to a single address.
There is a write-up here:
http://bitcoin.org/en/protect-your-privacy
Anyway, my understanding is that the only thing the government can see is "clustering" resulting from poor practices by bitcoin users. And, that Silk Road's flaw was their own process which made clustering a huge exposure for all users, regardless of how careful they were to maintain privacy outside of Silk Road. Anytime you're asked to deposit coins into an account at another site, you lose all control over privacy. That's not the same as a simple transaction with another user within bitcoin's infrastructure.
I could be wrong. I urge everyone to perform their own due diligence. But, it's my understanding that bitcoin isn't anonymous, but can be private if used carefully.
EDIT: by the way, you can reduce traceability of coins to you by purchasing bitcoins with cash (via localbitcoins.com). You pick a seller with a good reputation, deposit the cash to their bank account, and they deposit the coins to your wallet. This effectively breaks the visibility (identification) of credit card or bank debits to buy coins.
No point of origin tied to your identity. Even the guy you buy them from doesn't know who you are. Just a cash deposit to his bank account, and your bitcoin "address" he's to transfer coin to. Using bitcoins blockchain he could watch how those coins move around (transactions). But, he wouldn't know who you are. If you use techniques described above (separate wallets, change addresses, etc.) there would be no way to correlate those coin (and what they were used to buy) and other coin (used to buy Elvis posters, music, etc.).
There are bitcoin "mixers" (like bitcoinfog.com) which blend your coin with other users, obscuring original ownership. You end up with the same number of coin, but the trail of possession is ended. Suddenly some guy in Norway has my coin. I have coin from a grandmother in Mongolia. Etc.
If you buy in cash, a mixer won't add much value. I think Dr's point was that doing things like buying in cash (receiving coin without verified bank transactions through your wallet) could attract attention. Using a mixer (abrupt custody changes) could also attract attention. But, at this point your coins are anonymous. Your wallet/address may attract attention, but nobody knows *who* owns it.
The key here is maintaining no link between your IP address and access to your wallet's address.
A good article about how to do this is here:
http://www.reddit.com/r/Bitcoin/comments/1c8yb3/a_stepbystep_guide_to_creating_an_anonymous/
Bitcoin is a steep learning curve. It offers much more privacy than credit cards. But, (as dr suggests) can attract attention to you. Which makes the learning curve more important, and maintaining your own privacy.