You must have heard that the Bitcoin blockchain lets you make anonymous cryptocurrency transactions. This is one of the main reasons why it’s thought to be a safe haven for criminals and black market traders, as many people believe that the activities on the Bitcoin blockchain are impossible to trace.
Well, this is not the entire truth behind the Bitcoin network. Actually, the most significant characteristic of blockchain technology is the fact that every network node keeps a record of all the transaction data that took place on the blockchain, and that digital record is publicly available to anyone. In other words, every step is recorded and continuously compared by all the nodes in the Bitcoin blockchain.
Even though in recent years, some cryptocurrencies, such as Monero (XMR), Zcash (ZEC), and Dash (DASH), have managed to provide near-absolute anonymity by utilising obfuscated ledgers, Bitcoin is not one of them.
So, where does this misconception of untraceable Bitcoin transactions stem from? And if they can be traced, how can one do it? Hopefully, after reading this article, you will have the answers to these questions.
Cryptocurrency or Bitcoin Mining
Cryptocurrency mining is the process of claiming newly generated coins as an incentive for the computational work one provides to the blockchain. Today, mining is performed using sophisticated hardware that solves complex mathematical problems. All the miners compete to come up with a solution to this problem, and the first one to find a solution validates the next block and claims the block prize.
Cryptocurrency mining is the backbone of PoW based cryptocurrencies such as Bitcoin. There are other cryptocurrencies that use different consensus mechanisms, such as PoS or DPoS. Among other things, the consensus mechanisms used by a particular asset are responsible for the assets’ traceability.
For Bitcoin, the process consists of miners validating blocks of incoming transactions and adding them to the blockchain. They create a record of those transactions, which is impossible to alter. However, the blockchain is a ledger that is open to public access, which means with the right tools and an educated pair of eyes, it is possible to trace transactions on the blockchain.
Why Would You Want to Trace Bitcoin Transactions?
Cryptocurrencies have been very attractive for people with malevolent motives because they are secure and decentralised. For the same reason, even though some AML regulations have been implemented, governments and people worldwide have been so far suspicious of crypto coins, as they aren’t regulated by jurisdictional authorities and seem liable to hacker attacks and scams. Tracing Bitcoin transactions would come in handy in these types of situations.
So, you might want to trace your transactions to recover your assets in case you’ve been victimised by a scam or someone hacked your account and siphoned off your digital assets. Or you are simply curious about the mechanism behind the Bitcoin blockchain and the extent to which your transaction history remains private. Whatever your motivation is, tracing Bitcoin transactions is easier than you think.
Is Bitcoin Anonymous?
No, it’s not. In fact, the whole blockchain technology depends on keeping a permanent public ledger of all the transactions made on the network. The ledger only keeps the date, time information, and the public keys (or wallet addresses) of the sender and the receiver. So, every Bitcoin address that was involved in a transaction is actually traceable. Because Bitcoin network API (application programming interface) is a common courtesy, you can reach the public blockchain with the help of some bitcoin analysis software. The challenge is to make sense of the data and link the transactions to a real person.
Although the Bitcoin network is not anonymous, we can still say that it’s pseudonymous. Since not all crypto wallet services require KYC verifications such as ID documents like banks do, tracking down the transactions to a real person is not very easy, just like it’s not that easy to track down the hackers to their real identities. However, even the founder of the infamous illegal internet shop Silk Road, Ross Ulbricht was caught and sentenced to life in prison after a couple of years of operation.
How Do People Stay Anonymous on the Bitcoin Network?
An idle Bitcoin wallet can stay anonymous, but once it receives any amount of cryptocurrency, it becomes a part of the blockchain. Fraudsters know their transactions can be traced, so they often move their illicit gains through many intermediary transactions. It’s effortless to obtain multiple Bitcoin wallets, so they can just move the assets back and forth to create confusion.
There are also software called mixers, developed specifically to increase the transaction privacy within the Bitcoin network; however, they also come in handy when someone needs a money-laundering service. The way they work is they receive coins from many different accounts, mix them all together and send back the same amount with different bitcoins.
Because it is possible to have the coins go through hundreds or even thousands of different accounts before reaching their final destination, it can be tough to track them. However, when there is a prominent swindle like what happened to Cryptopia or Binance, even if we can’t trace the hackers to their real identities, we can figure out which coins have been stolen. This information allows cryptocurrency exchanges to deny cashing out those coins. So at the end of the day, even if we fail to identify the fraudsters, we can make the stolen coins unspendable in the hope that this kind of tracing mechanism can discourage hackers in the digital currency ecosystem.
In summary, remaining anonymous in the blockchain network is a task of diligence. Of course, there are also some strategies that you can follow to track down the address to the person behind it, but the practicality depends on how cautious that person is.
How to Trace Bitcoin Transactions?
Now that we know that the Bitcoin blockchain is a public ledger that anyone can reach and read. The hard part is, making sense of the crypto flows recorded in the public blockchain.
The Bitcoin network is a whole different universe from the real world traditional banking network that we are familiar with. For example, you can send Bitcoin (BTC) to many different accounts using only one transaction. Features like this allow shady activities to remain in the shadows. But it is still possible to shed light wherever we can. To do that, you will need some software to detect the patterns and help you understand what is going on behind all the data encrypted on the blockchain.
There are many different services out there to help you trace transactions, such as blockchain.com or blockcypher.com. These services give you the timestamp and address information on a list. For sure, this is valuable information, yet not very intuitive. For a better experience, we suggest using oxt.me.
Oxt.me is a tool designed to help you do an exploratory blockchain analysis on the Bitcoin blockchain. It was a product of a single person before Samourai Wallet acquired it in 2017. Currently, you can use it online without paying any fees.
An exploratory analysis consists of temporal charts and histograms. This is what Oxt.me does for you. It processes the blockchain with a couple-of-hours delay and gives you a visual representation of the history of the transaction.
To perform an exploratory blockchain analysis on Oxt.me, you only need to enter the transaction ID or the hash of the transaction you want to track. This will give you a list of connected wallet information. If you click on the little button on the left of the screen that says “Tools” on it, you will see a 3D map of the transaction you searched for. By double-clicking on the nodes, you will be shown a map of the other nodes that have verified those specific BTC. The best part is that you can follow the Bitcoin (BTC) transactions by intuitively double-clicking on the nodes.
A Few Words Before You Go…
Most people often think that Bitcoin is impossible to trace because it is a trustless network without a central authority. However, as blockchain technology becomes a permanent part of global trade, jurisdictional authorities and individual users are getting familiar with the blockchain network and what it really can (or can’t) offer in terms of transparency.
The Bitcoin network is based on a decentralised public ledger that keeps track of every movement ever made. For now, even though we can’t trace the transactions to the criminals themselves, we can make their illegal gains impossible to cash out. The cryptocurrency ecosystem may still be inviting criminal activities; however, the misconception around it being highly anonymous is certainly changing. Tracing Bitcoin transactions is actually an easy job and if we develop techniques to monitor malicious actors, we can make a much more secure network that increases our take on finance and commerce as a whole.