Is bitcoin traceable?

*This article was originally posted in August 2021 and was last updated September 2022.

Main Points

  • Bitcoin is traceable. Each transaction is recorded on a permanent publicly available ledger known as the blockchain.

  • Bitcoin is not anonymous; it is pseudonymous. Your bitcoin wallet address is essentially an alias used to make transactions on the bitcoin network. 

One of the biggest myths surrounding Bitcoin and other cryptocurrencies is that they are used mainly by criminals to fund illicit activities. Appointed officials, including US Treasury Secretary Janet Yellen and President of the European Central Bank Christine Lagarde, have both made statements this year that cryptocurrencies are concerning when it comes to terrorist financing and money laundering activity. 

However, these concerns are largely exaggerated. A 2020 report by Elliptic, a crypto compliance firm, found that illicit activity accounts for less than 1% of all cryptocurrency transactions. 

In fact, physical cash is way more commonly used in criminal activities and money laundering because it is difficult to trace. Cash passes from hand to hand, and there is no paper trail left behind. 

In contrast, Bitcoin is pretty easy to trace, especially when compared to cash. 

Is bitcoin traceable?

Yes. Bitcoin is traceable. While bitcoin can be minted, moved around, and stored without the oversight of any central authority like the government, each bitcoin transaction is recorded on a permanent publicly available ledger known as the blockchain.

Realistically, every bitcoin can be traced and tracked from its initial wallet to the one it currently sits in today. However, the blockchain only stores the public addresses of crypto wallets, not real-world identities. This makes bitcoin pseudonymous rather than anonymous. Your bitcoin wallet address is essentially an alias used to make transactions on the bitcoin network. 

Why do people think bitcoin is anonymous?

Despite being one of the most transparent payment networks in the world, Bitcoin was designed with privacy in mind. It is anonymous in the sense that you can hold a wallet address without revealing your true identity with that address.

In the original Bitcoin whitepaper, inventor Satoshi Nakamoto suspected that wallet addresses could be used to link transactions to a common owner and actually recommended that users use a new address for each transaction to provide acceptable levels of privacy.   

What makes bitcoin traceable?

While the bitcoin network operates outside of the purview of regulators, crypto service providers like exchanges do not. This means that most of these services are required to implement some degree of know-your-customer (KYC) solutions, therefore linking a real-world identity to bitcoin addresses and transactions. 

So, if you have a bitcoin wallet that has never been used, it is still totally anonymous. But, if you have ever submitted any KYC documents when buying or selling crypto, then your identity is in fact linked to those coins in some way. 

How are bitcoin transactions traced?

Anyone can do rudimentary bitcoin tracing using standard blockchain explorers. However, these tools are not suitable for tracing suspicious transactions. Criminals tend to go to great lengths to obfuscate their trail by using multiple wallet addresses. 

To trace suspicious bitcoin activity, law enforcement agencies typically partner with blockchain data platforms like Chainalysis to conduct investigations. These investigations usually start with digital breadcrumbs left behind in cyber hacks or online scams used to track down a wallet's owner by utilizing criminal's past internet history and cross-referencing with KYC information from crypto exchanges. 

Scams did become less prevalent as crypto entered a bear market, which might be considered a small silver lining in otherwise tough market conditions. In August of 2022, Chainalysis published a report that highlighted the decrease in crypto scam activity for the beginning half of the year. This drop in scams targeting crypto investors was counterbalanced by an increase in funds stolen by hackers, though. Crypto exchanges, DeFi protocols, and internet-connected “hot wallets” had $1.9 billion worth of crypto stolen by hackers in the first half of 2022, a 58% increase from the amount of stolen funds for the first half of 2021.

There have been several examples of law enforcement agencies tracking down millions of dollars in stolen bitcoin. In June, the Department of Justice announced that it had seized 63.7 bitcoins taken during the colonial pipeline ransomware attack. 

On an international scale, the Department of Justice reported in 2020 that it used Chainalysis to trace $28.7 million in cryptocurrency stolen by a North Korean hacker group and were able to prevent them from laundering these stolen funds through exchanges.

These are just a few of the many examples of law enforcement using bitcoin's transparency to find large sums of illicit funds. 

Final Thoughts

The narrative that Bitcoin and other cryptocurrencies are predominantly used for criminal activity is simply not true. Unfortunately, because many do not fully understand cryptocurrency, misinformation about how it works and who uses it spreads easily.  

Once you look past frightening headlines and develop an understanding of the fundamental principles behind Bitcoin and other cryptocurrencies, you will see just how beneficial the technology is and how it can radically transform the financial sector. 

If you're interested in learning more about some of Bitcoin's most significant benefits, check out this article: The 5 Biggest Benefits of Bitcoin

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