Is crypto transaction and address traceable? In the earlier days, cryptocurrencies, especially Bitcoin, were considered to be a safe haven by the users.
It was thought to be anonymous and therefore the address and the transactions made could not be traced.
However, over time, people have come to know the reality and consider it to be a myth today.
It is due to the development in technology and availability of some of the most sophisticated blockchain analysis software that can be used to trace Bitcoin and crypto transactions and addresses. Surprised? Well, you should be.
A major section of the crypto users still believe that crypto transactions and addresses are completely anonymous.
Well, it is not – at least it is not ‘completely.’ Any crypto address can be traced by using forensic analysis.
This means that these crypto transactions and addresses that are recorded on a distributed public blockchain are actually pseudo-anonymous.
These are therefore available to everyone and open for all to see. However, this does not mean every crypto address will reveal identifiable details.
It simply gives a footing for additional investigation.
A crypto address is much like an online alias or your email address which is visible to all but not accessible to anyone without knowing the password to it.
This means that it all depends on what you do with your address and how the other party is inclined to find you.
This is the right place to be if you want to know more about the possibilities of tracing crypto transactions and addresses along with the ways this is done.
You will also know about the challenges in it as well as the ways in which you can protect your crypto account and address.
Is Crypto Transaction and Address Traceable?
When you deal with cryptocurrencies you actually need to create a wallet with the online trading platform.
This is an address where you receive your coins and send them from.
It is actually a long string of hexadecimal complex numbers and is unique for each wallet.
If the privacy and security aspect of the network is compromised, anyone can get into it and see the transactions made from it.
And, since the wallet may be linked to your personal identity, one can even make out whom the wallet belongs to.
When this wallet address is shared publicly on a forum or any other place even without any identifiable information, it is likely that you may have shared those details or used the similar username in another post somewhere else.
And, if you use your email address to sign up to the forum, you make it public as well.
It is not difficult to connect the dots using your posting history and track you.
The crypto wallet address links another person to it such as the merchant from whom you buy something.
Though the merchant will be least inclined to trace you considering the cost involved in it, the police may be, if you are involved with something nefarious with it.
Also, it is possible to group multiple Bitcoin addresses together since all transactions made on the blockchain can be visible and all these addresses are tied together.
Therefore, even if only one wallet address is linked to some identifiable information, the identity of all others can be traced. And there is more than one method to do it.
This may seem a bit complicated for you to understand.
However, you can understand the traceability aspect of crypto wallet addresses and transactions if you have a fair bit of knowledge about crypto operation and the history.
As said earlier, being decentralized, all crypto transactions are recorded in a public ledger whether you are making them with your own wallet or through a crypto exchange.
This is updated continuously and visible to all. However, due to building common transactions and mixing them, tracing a particular address can be quite a difficult job and the privacy and security of a blockchain is constantly strengthened.
The Myth of Anonymity
Therefore, considering the above facts, it can be rightfully said that the anonymity surrounding crypto transactions and traceability of crypto addresses is a myth. In fact, it is pseudonymous.
This means that though real-world identities are not stored on the blockchain, it is possible to link the two using specific software programs.
One such way to do it is by using VASPs or Virtual Asset Service Providers.
Most of them implements KYC or Know Your Customer solutions which is the primary source to link crypto transactions and addresses with real-world identity.
It is due to the pseudo-anonymity of crypto that facilitates instances of criminal activities linked with crypto, Bitcoin especially.
Experts and researchers also found out commands and software programs that can creep into the blockchain network.
It is due to these potential vulnerabilities that allow others to see the balance in a crypto wallet along with the transaction history.
Ideally, the experts believe that there is no system built in that can identify who the owner of a wallet address is.
Therefore, there was really no need for a KYC solution to have a wallet in the first place.
This, they believe, is the origin of the myth surrounding crypto anonymity.
People think crypto to be more anonymous than traditional fiat currencies because normal currencies, even if it is exchanged to a foreign currency, can be traced by the apex bank that controls it.
But, in the case of the cryptocurrencies this is not possible because there is no central authority governing it.
Also, one can even follow the old-school barter trade with crypto. They can give some crypto coin to a person to get some other object.
This feature can not only enable people to evade taxes on capital gains but also promote illegal activities.
However, if proper technology is used, the blockchain cannot hide anything of a transaction because the time, date, amount, and the wallet addresses that the money was sent to or received from all are visible in the trail.
The investigators can even analyze other transactions that were made by other wallets linked to it.
All this means that your Bitcoin or crypto wallet address can only be anonymous when it sits idle and is empty.
If there is anything sent or received, the identity of both the sender as well as the receiver can be ascertained by the law enforcement.
How to Trace Transactions?
Crypto transactions can be traced from where it is stored permanently – on the blockchain.
Since it is a public record, it is not very difficult to dig for information necessary to find out where the money was sent or where it came from.
However, specific software programs will be necessary for it along with a lot of technical knowhow to track crypto wallets, IP addresses, transactions and networks.
It is also a costly and time consuming process.
Sometimes it may take several days to trace and map all the transactions made in hundreds of intermediary crypto wallets, which the criminals usually do.
This means that if you are an average blockchain explorer with standard equipment you will not be able to trace Bitcoin wallet addresses and transactions effectively.
There are different technologies used to trace crypto transactions and addresses.
These usually come with the most sophisticated algorithms that can easily trace a money flow on a blockchain.
Apart from that, these programs also provide a money flow graph.
This is another good and useful visualization tool to track and investigate crypto transactions.
In order to reduce the time taken to trace transactions, instead of using an average explorer which is ineffective in cracking every layer of the multiple wallets in between, a single API call is used. This is provided by the advanced software used for this process.
Several visual tools such as the money flow graph are also used for investigating crypto transactions and addresses.
Few technologies and software programs may also allow building customized visual tools if necessary to identify the money flow.
Such visual tools will allow the investigators to see each and every incoming and outgoing transaction with respect to the wallet address in question.
Another significant way to identify the crypto transactions is to detect the specific pattern of transactions on the blockchain.
This can be done by the investigators by using the blockchain addresses classification technology.
In this method the number of transactions carried out every day on a specific blockchain along with the amount of each transaction can identify a wallet address and find out whether or not it is owned by the user in question.
Ideally, this is done by deducing the transaction pattern which indicates different kinds of groups.
The investigators analyze these groups carefully and are able to find out several important facts such as the custodians used, and the payment services involved along with other types of VASPs, if any.
Once the specific crypto service is identified, it becomes much easier for the investigators to identify every address that is involved and has interacted with that particular crypto service while the transaction was made.
This becomes even easier and faster if the KYC solutions implemented are referred to.
Ideally, tracing crypto transactions and addresses through VASPs is a much easier and more effective method because this forms the backbone of most of the compliance solutions related to crypto.
Challenges in Tracing
There are some challenges in tracing crypto transactions and addresses and these are pretty hard to overcome without proper technical knowledge. This is why tracing crypto transactions is not suitable for any average blockchain explorer.
First, the blockchain technology typically relies on the database that comprises a complicated hexadecimal alphanumeric string.
This is quite hard to decrypt and identify a transaction because there is no real-world identity or information available in the database.
Second, the self custody of funds and intermediary wallets also makes it very difficult and time consuming to trace crypto transactions.
These multiple wallets are quite easy and effortless to create on the blockchain network.
There can be thousands of such wallets created that allow self-custody of funds that are easily and quickly processed through them to veil identity as well as the source.
Thirdly, services like mixers also add to the difficulty level in identifying crypto transactions because these are built specifically to improve privacy of the blockchain.
However, these mixers are used by the criminals to mix the funds thereby creating a lot of problems in tracing the transactions.
Finally, unregulated crypto services such as the Virtual Asset Service Providers allow the users to create services on top of a blockchain without needing to abide by any Know Your Customer or Anti Money Laundering laws.
This makes it much easier for the criminals to move dirty money illegally and then convert them into fiat money.
Is it Good?
The fact that sophisticated blockchain analysis software today allows tracing crypto and Bitcoin transactions and addresses is good.
This is good in a way because the general public will be afraid to misuse crypto or launder dirty money with it.
It is also good for the investing and intelligence agencies as well because they can easily spot any criminal activity or illegal transactions made on the blockchain and trace the source and destination of the money.
In fact, all payments made using Bitcoin will leave a trail behind and this has raised concern of the governments about the possibility of it being used for some criminal activity.
A lot of people also think likewise and consider blockchain to be the worst possible mechanism to use for that purpose.
Using such trails the intelligence agencies and investigators can follow the source and destination of a transaction.
The KYC requirement of the crypto exchanges also makes the job quite easier for the law enforcement authorities when these are shared and investigated.
However, tracing Bitcoin and crypto addresses and transactions is not easy. Investigating agencies use ‘crumbs’ of information to trace them along with the money trail.
They also look into the ‘Darknet’ markets to gather more information and even ‘sniff’ data by mining crypto themselves.
They may also look through the past history of criminals from the internet and cross-reference everything collected with the KYC information shared by the crypto exchanges.
This makes it easy to identify a transaction and the owner of a wallet address.
In short, it can be said that the flow of cryptocurrencies today can be traced more easily than any traditional bank transaction by using special software.
For example, in May 2021, the US FBI agents were able to track a ransom worth $2.3 million paid online in Bitcoin to a criminal group.
Moreover, technological advancements of late have reduced the amount of time and effort required to link a crypto wallet address to the identity of a person or even an IP address.
This has helped the law enforcement in a great way as well.
If they cannot do it themselves, they can use the crypto exchanges that need identity verification of the users to sign up with them or hire crypto experts for that matter and identify the transactions and track illegal earnings and payments.
There are also several companies that have been involved in such jobs.
These companies can also help the FBI and other investigating agencies a lot in identifying crypto wallet addresses that are related with any sort of criminal activity such as funding terrorism or Darknet transactions.
These companies use advanced blockchain analysis software as well as several public and online clues to identify the real identity of any transaction.
A few of these companies may sometimes infect even their own systems with ransomware in order to find out the coins that are demanded for decrypting the computers.
This helps to identify the virus and even the person behind the virus. These companies can be an additional aide to the law enforcement to help them recover the ransom paid.
Apart from helping the law enforcement to detect and minimize criminal activities using crypto coins, the transaction tracking technology also has several other good uses in the real world.
One of the most significant use cases of this technology is to help the banks and other financial institutions to comply with the necessary and strict Know Your Customer and Anti Money Laundering laws.
This is extremely necessary now with the ever increasing number of crypto investors and traders entering this exciting space.
Also, this technology can help the crypto industry on the whole along with the crypto investors and traders a lot.
This technology will help them to observe and analyze the market trends.
This way the crypto investors can have a lot of good information and insight much before any official statements are even released.
What About Privacy Coins?
Most of the private coins such as DASH, Monero, Zcash, and Verge are also traceable but to a limited extent.
Once again, it is the intrinsic nature of the blockchain technology which is public and visible to all that makes it possible.
However, privacy coins like Monero and Zcash may pose significant problems for the blockchain analysts.
This is because Zcash, in particular, uses a more sophisticated technology called ‘zn-SNARKS.’
This technology helps its blockchain to hide most of the transaction data including the details of the recipients and the sender as well as the amount that has been transacted.
However, details of the users can still be identified because most of the users of Zcash hardly use their privacy options.
Along with the data gathered, if the real world events and the timestamps of the private transactions are matched it will be easier to identify the users involved.
The real world events include activities like and are not limited to purchasing any product online or selling crypto coins for fiat money.
Monero, on the other hand, uses advanced technologies such as stealth addresses and RingCT that helps in hiding data of the users.
This feature makes this coin a truly private coin by default.
These technologies usually pull out six different signatures from the blockchain at random when you make a transaction on the blockchain.
These are then included in your transaction.
This makes it extremely difficult, if not impossible, for any person viewing the transaction to find out which particular signature on the blockchain actually belongs to the sender.
Tips to Protect Privacy
There are millions of users all over the world who deal with cryptocurrencies some way or the other either for commercial purposes or for personal use every day.
User privacy is very important and should be protected according to the Universal Declaration of Human Rights.
Every business and even the enforcement agencies should ensure that this is preserved and well protected.
This is not a zero-sum game as it may sound. User privacy is crucial for cryptocurrency adoption.
However, it is also very necessary for the law enforcement to identify potential criminal activities on a blockchain.
If that is not done the crypto world may experience sweeping legislation which may even result in prohibiting all commercial activities using cryptocurrencies in any form.
Therefore, it is very important for the businesses and the law enforcement to understand the value of privacy of the users and uphold it at all cost even when they need to deploy crypto compliance solutions or crypto transaction tracing technologies.
Well, your identity while using blockchain for making crypto transactions can be protected along with your privacy and wallet address if you follow a few specific points.
There are a few specific tools and services as well that you can also use in order to protect your personal as well as your economic privacy while dealing with crypto coins.
Do not make your address public:
First, you must make sure that you do not publish your crypto address publicly.
This is a very foolish idea to do basically because when you publish your address on the websites or social media you will make your address known to the potential bad actors out there.
Therefore, unless you are into any charity or want to organize any fundraising campaigns to receive payments and public donations, it is not a good idea to publish your address.
And, if you have to publish your public address for some reason make sure that you move the funds received in this address immediately to another. This will also protect your funds.
Mask IP Address:
Secondly, make sure that you mask your IP address by using the Tor browser or any other Virtual Private Network service. This will make your wallet address literally untraceable.
This is a good process to follow because Bitcoin in particular is a P2P network and therefore it is possible to log the IP address and listen to transactions.
However, even if the IP address is logged in some cases, it will be almost impossible to track back and reach you because you will have already masked your IP address.
Using the Tor browser is also recommended because doing so you will be able to hook up with the Bitcoin network since this browser offers surveillance free browsing and therefore provides anonymity.
The Tor nodes will encrypt your IP address and route the internet traffic to your address through an assortment of other nodes. This will make it really difficult for anyone to pinpoint your IP address.
Using a mixer or tumbler:
Thirdly, you can also use a mixer or a tumbler to cover your trail. You will find several online service providers out there that will offer you the ability to mix traceability.
This is done by mixing the users who send or receive the same amount by using independent crypto addresses.
This is a very useful and comparatively easy process to follow especially if you are dealing in small amounts.
Just make sure that the service provider that you choose is reliable and reputable.
Conduct some research before you choose one so that they themselves do not steal your money and at the same time keep a log of all your requests.
Remember, depending on their jurisdiction and area of operation, their legality will vary and all of these services are not 100% trustworthy.
Create new addresses:
Finally, you should create a new address after every payment is made or to receive any.
This will prevent the old crypto address from linking all your past transactions along with your crypto balance.
Remember, you are allowed to use multiple wallets to store your crypto, especially Bitcoin, separately.
When you use different crypto addresses it will be very difficult, if not impossible, for anyone to trace your transactions back to you. Add to that, people will also not be able to see the number of Bitcoin you own now or received through the previous transactions.
All these steps are proven to protect your privacy which is your responsibility though cryptocurrencies provide anonymity and economic liberty to the users.
Ideally, crypto addresses and transactions are not anonymous. These are just very hard to trace by any average person without the knowledge of the right software to use for it. This article must have enlightened you about the anonymity myth.