How are Bitcoin transactions traced

Nov 13, 2022 6:48 PM
How are Bitcoin transactions traced

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 seller.
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.

Bitcoin addresses

The important part of the Bitcoin blockchain (or any other blockchain) are so-called addresses. These can be divided into two groups:
  • Private;
  • Public.
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 owners.
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 sanctioned individuals.
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 wallet.
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.

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