The best way to keep your Bitcoin transactions from being traced is not to let others know about your Bitcoin address. Since all Bitcoin transactions are on a public ledger, everyone can see it including government agencies and you could be subjected to money laundering charges if found guilty. It is not hard to trace their source once they are on a Bitcoin network and can be tracked down in various ways.
What is a Transaction?
A Bitcoin transaction is a transfer of financial value between two or more Bitcoin addresses and gets included in the Bitcoin Blockchain. These wallets maintain a secret piece of data, known as Private Key that is used to sign all transactions and provides mathematical evidence that they came from the wallet's owner.
The signature safeguards every transaction from being manipulated by any middleman once being issued. Every Bitcoin transactions get broadcasted on the network and normally gets confirmed within 10 to 20 minutes through mining.
How Can Be Bitcoin Transactions Traced?
There are several ways Bitcoin transactions can be traced back to its source, including:
1. By Publishing Your Name and Bitcoin Address Together Online
The most common way of leaking anyone's Bitcoin address is by publishing the address along with its owner's name. This is rather common in cases of people asking for donations, getting paid for freelancing, trading Bitcoins for local currency, etc. In this case, everyone with Internet access can view your Bitcoin address.
2. Trading Bitcoins for Local Currency
When you trade Bitcoins for your local fiat currency on a crypto exchange, you have to publish your Bitcoin address along with other details. Here, the exchange knowns the details of your Bitcoin address and can be traced back to its source easily if the exchange violates any terms of money laundering policy it works under.
3. During Purchasing Items with Bitcoin
When you buy any items with Bitcoin you have to publish your address while paying for the item. Here, the merchant and the payment processor used for payment like Coinbase and Bitpay knows the details of your Bitcoin address. Unless you are buying some digital goods, you have to publish your shipping details also. Hence, not hard to track you down.
4. By Using Advanced Tools Like Chainalysis
Chainalysis is a Blockchain-based startup whose software and other investigation tools are used by the various financial institution, governments, and crypto exchanges to trace the source of Bitcoin address in case of any discrepancies or any potential money laundering case. Their advanced tracking system will trace that address within minutes and the owner could in trouble if found guilty.
How to Avoid Tracing Your Bitcoin Address
To protect yourself and your Bitcoin address, you need to follow the tips mentioned below:
- Use anonymous browsers like Tor while dealing with Bitcoin transactions.
- Use reputable VPN services that can encrypt your entire Internet traffic and send them through multiple servers of your choice.
- Always use new addresses for your transaction or even better if you can get a hardware wallet like Ledger Nano S or Trezor.
- Use P2P services like LocalBitcoins.com to trade Bitcoins.
As you can see tracing Bitcoin addresses back to its source is not that tough and, in most cases, it's the owner's fault. So, it's better not to participate in any Bitcoin transaction where you feel the need to hide your identity and your Bitcoin address. However, if you have no alternative, then it's better to use Tor or some reputable VPN services.