If I never conduct transactions from an IP address associated with my real life identity and never conduct a transaction with someone who knows me in real life how can using the same address all the time (for the sake of simplicity) hurt my privacy?
There's a bigger attack surface for someone that wants to doxx you. They only need to link a single transaction to your real life person to know all the transactions you've participated in. A single payment to newegg, for instance, will identify you across all transactions.
Very few transactions are completely anonymous. But yes, if they're all completely anonymous, then you won't be hurting your privacy. However, that's much more the exception than the rule and you're probably leaking much more information than you think you are.
The more transactions tied to a particular address, the less the privacy. Hence a need for individuals to use Hierarchical Deterministic (HD) Wallets that generate a different address for receiving each transaction..
Look at difficulty factor and note 14TYdpodQQDKVgvUUcpaMzjJwhQ4KYsipa. Then look at 14TYdpodQQDKVgvUUcpaMzjJwhQ4KYsipa. With the example, it looks like Pieter Wuille (aka Sipa) has received almost 10 BTC, but currently has 0.1 BTC in his wallet - probably not worth a mugger's time. Note that every transaction is public information, includes dates and amounts spent.
Here is a short list of technologies that are mostly complementary for improving privacy:
- Hierarchical Deterministic (HD) Wallets - improves privacy via obfuscation
- TOR or I2P - reusable network and application anonymity, confidentiality technologies
- CoinJoin, CoinMarket, CoinShuffle, CoinSwap - payer/sender anonymity
- Ring Signatures - payer/sender anonymity
- Stealth Transactions - payee/recipient confidentiality
- BIP 47
- Confidential Transactions - spender & recipient confidentiality
- ZKCP (Zero Knowledge Contingent Payment) - trusting transactions without 3rd parties
- ZK-SNARK (Zero Knowledge Succinct Non-Interactive Arguments of Knowledge) - bleeding edge
The application of stealth addresses (#5) or BIP 47 (#6) could have improved Sipa's privacy, but few wallets currently support such capabilities.