Despite what you may have heard, Bitcoin transactions are not anonymous and can often be traced with relative ease.
The reason? Most people who’ve bought Bitcoin or other crypto will at some point have signed up to an exchange.
And those same people will have used one of the big exchanges that will have required an identity check when they joined.
From that point onwards, any transactions or transfers you make are recorded against your name, meaning anyone given access to this data can track your Bitcoin transactions.
Also, every Bitcoin transaction made is recorded on the blockchain and can be viewed by anyone on the public ledger.
This is why some people recommend only using a bitcoin address once to reduce the number of digital footprints you leave.
However, if you send Bitcoin from your account to a recipient who is using an anonymous Bitcoin wallet then from that point onwards it gets a lot harder to track the coins.
But that’s not to say that at some point in the future an action will be associated with the anonymous wallet address that will reveal the owner.
According to Bitcoin.org: “Once addresses are used, they become tainted by the history of all transactions they are involved with. Anyone can see the balance and all transactions of any address. Since users usually have to reveal their identity in order to receive services or goods, Bitcoin addresses cannot remain fully anonymous.”
Related post: Top 5 crypto exchanges to buy, sell and trade Bitcoin
Forensic crypto investigation is a growing industry
Specialist companies do offer services which will use forensic level techniques to follow the coins.
Crypto investigators are often called in to try and trace crypto handed over as part of high level ransomware attacks.
There have been some notable successes in tracing stolen Bitcoin that have hit the headlines recently.
One such case involved a ransomware attack on Colonial Pipeline in which 75 Bitcoins were paid to the hackers.
However, the Federal Bureau of Investigation (FBI) later traced the wallet address used to receive the ransom and at the time of writing had recovered around half the coins.
Can Bitcoin be traced and how? UK?
So how do investigators trace Bitcoin transactions and hackers?
Some methods are, for obvious reasons, not disclosed by professional investigators and law enforcement agencies.
But there are a few clues out in the open. The following methods used by investigators appeared in a Forbes article on the subject:
- Examining all the variables surrounding a transaction including the ID and address.
- Using bespoke software to analyse the activity history of Bitcoin wallet addresses.
- Examining input and output data, including the number of traceable transactions to exchanges.
There have also been cases of scammers posing as crypto investigators to steal money or Bitcoins from victims of other scammers.
So, if you find yourself needing the services of a crypto investigations company make sure you do your research first.
And avoid engaging with anyone who cold calls you offering these services, even if they claim to be from a reputable company.
Despite the increasingly sophisticated techniques being used by investigators, it’s still the case that once coins are moved around to wallets with no id attached to them it becomes much harder to track them.
But anonymous wallets are facing increasing scrutiny from Government regulators, alongside the wider crypto ecosystem.
Authorities push for anonymous crypto wallet ban
At the time of writing, the European Commission was mulling over a new wide-ranging package of anti-money laundering (AML) legislation which includes a ban on anonymous crypto wallets.
The aim of the legislation is to make all crypto-asset transactions visible and traceable in a crackdown illegal money flows through the EU.
Although difficult to enforce because of the decentralised nature of Bitcoin and other cryptocurrencies, many legitimate crypto users are likely to abide by the rules to avoid any run-ins with law enforcement agencies.
This defeats the point in a way, but expect further legislation and regulations designed to de-anonymise crypto transactions.
My Bitcoin’s been stolen – can I trace a crypto hacker?
It’s every crypto hodlers worst nightmare – you check your account only to find your coins have vanished.
Frantic enquiries are made to the exchange but all you’re getting back is accusatory emails pointing the finger at your lax security.
So who do you turn to?
As I’ve already mentioned, there are a growing number of companies who, for a fee, will attempt to trace your stolen crypto.
Whether you – or the relevant authorities – can reclaim it though is a different matter.
As we’ve seen, these cryptocurrency forensic investigators will attempt to link crypto addresses with real people while following the digital trail and monitoring linked wallets for activity which can also be tracked.
If you can foresee legal proceedings at some point, it’s essential that the crypto investigations company you employ follows proper chain-of-custody procedures that will enable their findings to be entered as evidence in a law court.
Some cryptocurrency fraud investigators in the UK will only take on private clients if the enquiry is made through a registered law firm.
Bitcoin mixer can help keep your crypto transactions anonymous
If you’re keen to keep your transactions as anonymous as possible, you can use what’s known as a Bitcoin mixer, or tumbler.
These services take crypto transactions and chop them up into smaller chunks before throwing them into digital bowl of other, unrelated, transactions and giving them a good stir.
All these transactions are then sent on their way to the correct destination, but the process of mixing the transactions – which in reality is a lot more complex than described here – aims to break the link between you and the destination wallet.
Be warned though, scammers have been known to set up fake mixers in the past to lure unsuspecting crypto into parting with their coins before vanishing with the crypto people have sent them to anonymise.
Related post: What is a Bitcoin mixer and how does it work?
Adam is the founder of The Crypto Adviser which offers experts guides and reviews on all things related to Bitcoin and cryptocurrency.
Adam is Diploma for Financial Advisers (DipFA) Level 4 qualified, a Member of the London Institute of Banking and Finance (MLIBF), and has worked for many years as a journalist and PR consultant, having studied with the National Council for the Training of Journalists (NCTJ).