Are Bitcoins traceable?


In the decade long history of Bitcoin, there were more than a few examples that demonstrate the disadvantages of using public keys to remain anonymous and the difficulties that users encountered in trying to preserve anonymity. The story of Ross Ulbricht and the Silk Road site is an excellent example of Bitcoin’s limited privacy.

Ross Ulbricht, known online as Dread Pirate Roberts, organized the infamous Silk Road black market that was one of the first marketplaces that adapted wide use of Bitcoins. From the very beginning, in an effort to avoid traditional financial instruments that are easily traceable, the site accepted payments exclusively in Bitcoins. They were ideal for Silk Road users, as many of them had limited access to financial services. The peer-to-peer cryptocurrency format was perfectly combined with the crypto-anarchist atmosphere of the site. Ironically, it was Bitcoin and blockchain that played the main role in capturing and condemning Ulbricht to a life sentence.

Ulbricht’s anonymity was guaranteed by the anonymity of his public keys, each of which was associated with a specific transaction history. The FBI used Bitcoin’s blockchain to bind transactions to previously captured servers. In the public registry, more than 3,500 transactions were discovered between the servers and Ulbricht’s personal laptop seized by the bureau. In this specific case, Bitcoin’s anonymity ended when the FBI managed to match public keys to Ulbricht.

There are three reasons why Bitcoin is considered anonymous and its users untraceable.

  1. Bitcoin addresses are not tied to the identity of users at the protocol level, which is one of its biggest advantages in terms of security when comparing Bitcoin to bank accounts and various other payment systems. Anyone at any time can create a new randomly generated bitcoin address (and password) without having to provide anyone with personal information.
  2. The identities of Bitcoin users are in no way tied to any transactions that they make, therefore, anyone can transfer Bitcoins from one address to another without the need to disclose any personal information. As with cash, the recipient does not need to know the sender.
  3. Bitcoin’s transactional information is transmitted by randomly selected peer-to-peer network nodes. While Bitcoin nodes are connected to each other by means of IP addresses, the nodes do not know are not aware whether the registered transaction was simply redirected or actually created by a transfer node.

How can my anonymity be revealed?

There are three main ways to uncover the identity of Bitcoin users.

  1. Even though all transactions are transmitted randomly via the peer-to-peer network, this system is nowhere near isolated as one would assume. If a hacker can access the Bitcoin network by successfully connecting several nodes, the information that they will get access to may very well be sufficient enough to determine the source of a specific transaction.
  2. A Bitcoin address can be associated with specific people if their personal information was in any way associated with these bitcoin addresses. This includes addresses used for deposits or withdrawals from regulated exchanges, public donation addresses, personal wallets, or simply addresses used to send bitcoins using personal information, like making payments in an online store.
  3. All transactions in the Bitcoin network are completely transparent to anyone interested. This allows you to connect several Bitcoin addresses and assign them to a specific user. Therefore, if only one of these related addresses is tied to a particular person in one of the ways described above, all addresses will lose their status of anonymity.
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