Tracking Bitcoin Investments: Is It Possible?

Bitcoin is often perceived as an anonymous payment network, but it is, in fact, probably the most transparent payment network in the world. All transactions are public, traceable, and permanently stored in the Bitcoin network. Bitcoin addresses are the only information used to define where bitcoins are allocated and where they are sent. These addresses are created privately by each user's wallets, but once used, they become tainted by the history of all transactions they are involved with. This means that anyone can see the balance and all transactions of any address. As such, Bitcoin investments can be tracked.

Bitcoin transactions are public

Bitcoin transactions are recorded on a public ledger called the blockchain. This ensures that the transaction is secure and cannot be tampered with. Bitcoin transactions are fast and efficient, and they can be made without the need for a third party, such as a bank or a financial institution. The blockchain is transparent, but hard to read. While your name is not attached to your address, your address is attached to your transaction history.

Bitcoin explorers allow you to map activity on the Bitcoin blockchain. Thanks to this transparency, transactions are traceable, and you can think of the blockchain as a kind of open database full of Bitcoin transactions. Other cryptocurrencies like Ether (ETH) and Solana (SOL) also have their own blockchain explorers. In all these explorers, you can find information about the transactions on the blockchain, such as how much crypto was sent and which addresses were involved in the transaction.

Despite the transparency of the blockchain, many people think that you can still make Bitcoin transactions anonymously. However, more and more countries are implementing Know Your Customer (KYC) rules, which require you to reveal your identity on centralized trading platforms. By disclosing your identity, it becomes a lot easier for the government to discover what transactions you have carried out and to see what is in your Bitcoin wallet.

Bitcoin addresses are unique

Bitcoin transactions are public, traceable, and permanently recorded on the blockchain. However, it's important to note that while transactions are linked to Bitcoin addresses, these addresses are not directly linked to the identity of the users. This means that while it is possible to see the balance and transaction history of any address, the identity of the user remains pseudonymous.

While it is theoretically possible for two addresses to collide and be the same, it is highly improbable given the vast number of possible addresses. This is due to the enormous address space, which allows for an almost infinite number of unique addresses. Even if we assume there will be one trillion addresses, the likelihood of a collision is extremely low at 3.42*10^(-27).

To protect their privacy, users are advised to use new Bitcoin addresses for each transaction and to utilise multiple wallets for different purposes. This helps to isolate transactions and prevents others from associating them together. Additionally, users should be cautious about sharing their Bitcoin addresses publicly, as it can potentially compromise their privacy.

Bitcoin transactions are traceable

Each transaction on a crypto exchange is linked to a unique address, enabling the possibility of tracking its movement. This address is like your digital signature or fingerprint within the blockchain network. This allows others to track the movement of funds associated with it.

By examining the crypto chain of transactions associated with a particular address, one can gain insights into where the funds originated from and where they were sent. For example, if you receive crypto (Bitcoins) from a friend who received them from an online store, you could trace those Bitcoins back to that online store or even further back in the crypto chain.

Blockchain analysis companies employ various tools and techniques to unravel the transaction history and identify the individuals behind them. They closely examine patterns, addresses, and transaction flows on the blockchain to gain insights into the movement of funds and potentially link them to specific owners.

While it is possible to trace crypto transactions, achieving complete anonymity in the crypto world can be challenging. However, if crypto users take certain precautions, such as using mixing services or tumblers that shuffle funds between multiple addresses, it becomes more difficult to track individual transactions accurately.

To enhance privacy in Bitcoin transactions, techniques such as using multiple addresses or wallets for different transactions, utilizing mixing services that obfuscate the origin and destination of funds, and employing privacy-focused cryptocurrencies can be used.

Bitcoin transactions are recorded on the blockchain

Each transaction is a public entry in the blockchain, and it is recorded in files called blocks. These blocks are split into four fields that organise the data recorded. The information recorded includes unspent transaction outputs (UTXOs), the block's size, blockchain version, block header hashes, the Merkle root, the coinbase transaction, timestamps, nonces, and the difficulty target.

The blockchain is transparent, and anyone can view transactions on a block explorer. However, it is hard to read, and while a user's identity is not directly linked to their Bitcoin address, their address is attached to their transaction history. This means that Bitcoin can provide acceptable levels of privacy when used correctly.

Bitcoin transactions can be linked to real-world identities

Blockchain Analysis

The blockchain is a public ledger that records all transactions involving Bitcoin. Anyone can view any transaction on a block explorer, and while the user remains pseudonymous, their address is attached to their transaction history. Blockchain analysis firms like Chainalysis employ advanced techniques to connect bitcoin addresses to real-world entities. They use clustering, identification, and categorization processes to analyse co-spends, change addresses, behavioural patterns, and obfuscation techniques.

Published Personal Information

Individuals may inadvertently post their Bitcoin addresses or link them to their real-world identities on social media, public forums, or content monetization platforms. Anyone with access to both personal information and a Bitcoin address can choose to publish them.

Specialized Software

Blockchain analytics firms offer specialized software, such as Chainalysis Reactor, to detect and prevent illicit activity on the blockchain. These tools can connect bitcoin addresses to real-world activity, mapping hundreds of millions of addresses to entities and adding new tags each week.

Service Providers

Centralized crypto exchanges and on-ramp gateways often require users to undergo Know Your Customer (KYC) checks, which involve identifying customers and verifying sensitive data. If there are suspicions of illicit activity, service providers may be forced to comply with disclosure and seizure requests from authorities.

IP Address Tracking

Although challenging, tracing an IP address associated with a Bitcoin transaction can provide information about the network and physical location of the address owner. When combined with other methods, IP tracing can be a powerful tool for skilled investigators.

Regulatory Compliance

Traditional financial institutions and centralized crypto exchanges are legally bound to perform KYC checks to comply with anti-money laundering regulations. This means they collect and retain customer information, including government-issued IDs, bank statements, and utility bills. As a result, they can associate customers with all incoming and outgoing Bitcoin transactions on their exchange accounts.

While Bitcoin provides a level of privacy, it is essential to understand that transactions can be linked to real-world identities through various means. These methods highlight the importance of protecting one's privacy and the potential risks associated with Bitcoin transactions.

Frequently asked questions