How are Bitcoin transactions traced
The cryptocurrencies were designed to be a medium of exchange more anonymous than a traditional
banking system. A consumer doesn’t really need to identify himself and provide personal data to
use them, the registration of the wallets is very quick and provides some level of privacy.
But in fact, digital assets are not nearly as anonymous as we would like to think. Bitcoin,
being the most popular and highly sought, is at the same time the most transparent for tracing –
that’s why it’s called "pseudonymous.
How blockchain works
Blockchain gets its name due to its architecture: data is stored in 'blocks' connected in a
'chain'. Ordinary online transactions, such as buying products on marketplaces, paying with
PayPal, or simply transferring money using a banking app, usually go like this:
The buyer instructs a bank, PayPal, or other intermediary to transfer a certain amount to the
The intermediary receives the information, stores it, verifies it if necessary, and then
fulfills the order.
Cryptocurrency works a bit differently.
Blockchain is a decentralized database that chronologically record information about
transactions in a block or node. These data blocks or nodes are always connected to each other
in a daisy chain.
The blockchain is maintained by a network of participants running specialized computers. Once
the transaction is agreed between the users, it needs to be approved before it is added, whereas
in traditional systems this task is undertaken by an intermediary.
The technology is almost completely secure against unauthorized access. Each new block not only
stores the data of a new transaction, but also contains a summary of all the transactions. To
successfully change the data in a block, hundreds of thousands of copies must also be changed,
which makes this kind of manipulation difficult for large ecosystems.
And lastly the main feature of the network. People often use the terms 'Blockchain' and
'Distributed Ledger' interchangeably: all the transactions ever made for each cryptocurrency are
recorded from the first day of its existence. And there is more than a single copy of this
registry - all users who made at least one transaction have an exact copy of it. Each copy of
the blockchain is constantly updated as new blocks are found.
The important part of the Bitcoin blockchain (or any other blockchain) are so-called addresses.
These can be divided into two groups:
Private keys are a kind of password for your digital account. Without such a key, the
transaction cannot be confirmed and the money cannot be sent: so if you use a good tool for
storing digital coins, without a private key it will be extremely difficult for intruders to
gain access to the money.
If you want to receive or transfer money from your account, you need an account number or
public address to do this. This is the only way to clearly identify the sender and the receiver,
so that the public key acts as an identifier: both for the person who wants to send money and
for the one who wants to receive it.
The public address is the only identifier needed on this network. It consists of 34 random
digits and uppercase and lowercase letters, and is generated the moment you create a digital
wallet to store assets. Some services allow to use QR codes instead of addresses, simplifying
the process of interaction with the system, but it works just the same.
So what exactly happens when you send money? If a user wants to buy something, he takes virtual
money from his personal wallet. But instead of directing the transaction through a central node,
he directs it to be processed by the entire network. Once the virtual money reaches a buyer, the
entire network must confirm the transaction. To do this, it accesses the buyer's wallet data and
sees that three Bitcoins, for example, were taken from there. The network also accesses the
seller's wallet and now see that three Bitcoins were sent to him.
The network confirms the purchase because it can match the data from the two wallets, and the
transaction takes place. The data is stored and can no longer be deleted from there.
Tracing transactions manually
So you made the transaction, and now the sender's and the recipient's addresses remain forever
in the blockchain registry. Moreover, this data can be accessed by any user.
For example, anyone can see the name and the number of the public wallet of the desired person,
what and when something was sent from it. Recipient data is traced in a similar way.
There is also an alternative way - you can trace the data using the hash of a specific
transfer. This method is used if you have information about the transaction occurred, but no
information about the parties participated in it.
Tracing is also greatly facilitated by special monitoring services, in which you can enter, for
example, a public address and receive a record of transactions from it.
In this case, an average user will have difficulties to establish the identity of the owner of
the wallet. If a person uses the most anonymous depositories or exchangers, it will be difficult
to identify him or her independently.
Tracing transactions by exchanges
The tracing of users on exchanges deserves special attention. Today, many people use their
services for investments, trading, staking, cryptocurrency lending or other services provided by
operators. But not everyone realizes that the history of their operations is in full view not
only for the intermediary company, but also for hackers, who can subsequently use it to identify
This applies primarily to regulated exchanges. Such exchanges want to legally provide services
to residents of different jurisdictions and have to meet their requirements. In the EU, for
example, a licensed exchanges must comply with AML/KYC policy.
As part of the AML policy, exchanges must conduct a user verification procedure.
There are varieties of KYC requirements for cryptocurrency companies around the world depending
on the jurisdiction they are under. The following steps must be taken by cryptocurrency
exchanges in order to comply with KYC In Europe:
- Identify the customers by collecting their personally identifiable information (PII) such as
their full name, place of residence, date of birth, and address.
- Compare the information above with the official documentation presented by the individual,
such as a passport or state-issued driver’s license, as well as a proof of residence, such
as a utility bill.
- Run the customer’s identity through official databases containing data on PEPs and
Financial institutions should follow these steps. As long as everything appears to be in order,
the customer can use the cryptocurrency exchange for certain activities. But the data that you
provided during the verification procedure doesn’t disappear and remains with the exchange. If
necessary, they can easily be matched with the addresses of the wallets to which you transfer
funds, and then with other transactions, thus tracing the entire history of financial flows.
Under AML agreements, specially trained staff of the exchanges monitor the activities of their
clients. In some cases, coins may be marked as dirty because of the source, and the current
holder may have problems with them, even if he has nothing to do with it.
It is not only a morally unpleasant and time-consuming process. This approach also contradicts
the very concept of cryptocurrencies, negates all the principles of confidentiality and free
circulation of funds.
The very essence of tracing on trading floors and that third parties are fully informed about
economic conditions does not add to enthusiasm.
This is one of the reasons why digital asset holders turn to Bitcoin mixer services. Such a
tool allows you to get a clean, anonymized Bitcoin for a symbolic commission, mix transactions
and greatly complicate the process of tracing them. Mixing coins also allows you to avoid
blocking on the exchange in case the so-called “dirty Bitcoin” accidentally got into your
With the help of our service, you can quickly start the mixing process according to a special
algorithm. For a more effective result, we also use funds from our personal pool.