After nearly 10 years of partying with stolen Bitcoin (BTC), James (Jimmy) Zhong ran out of luck. With the help of onchain analytics firm Chainalysis, the Internal Revenue Service (IRS) Criminal Investigations team tracked more than 50,000 stolen BTC from the dark web’s infamous Silk Road to one of Zhong’s exchange accounts. After raiding Zhong’s Georgia home in 2021, IRS agents confiscated $3.36 billion worth of BTC, marking the largest crypto confiscation for an individual and one of the biggest financial seizures of all time.
While Zhong’s case is exceptional, it raises fundamental questions concerning BTC’s privacy standards. If Bitcoin is anonymous, how were federal agents able to trace these coins back to Jimmy Zhong’s profile?
In this guide, we’ll discuss the full details of how Bitcoin and other cryptocurrencies work, whether they’re anonymous, and whether crypto exchanges (both centralized and decentralized) are anonymous. We’ll also review if mixers and/or the Lightning Network make Bitcoin traceable.
Is Bitcoin traceable? Explaining anonymity on Bitcoin
Transactions on Bitcoin’s blockchain are transparent and traceable on a distributed payment ledger, which means it doesn’t provide traders complete anonymity when they transfer their coins. However, Bitcoin doesn’t link each user’s crypto wallet address with personal identification such as a name, home address, or phone number. Instead, every transaction on the Bitcoin blockchain shows strings of letters and numbers associated with each user’s public wallet address (aka public keys).
Public addresses show where BTC is on the blockchain. They’re used to securely send cryptocurrency without allowing others to move virtual assets. Each public key is cryptographically linked to a private key, which traders need to access funds stored in a crypto wallet. There’s no way to reverse-engineer the private key from the public key, which makes transactions secure on the Bitcoin blockchain.
Although everyone sees which public addresses hold BTC on the blockchain, there’s no information on who has access to each wallet. Unless a BTC trader publicly reveals they own a specific wallet account, all Bitcoin transfers are pseudonymous rather than anonymous.
Should traders share their Bitcoin addresses virtually?
Opting to publicly share a Bitcoin address requires careful consideration of various factors, including reasons for sharing, privacy concerns, and security implications. Here's a breakdown of the pros and cons to help traders make informed decisions:
- Donations or payments: If traders want donations or payments in Bitcoin, sharing their wallet addresses is necessary for others to send them funds.
- Transparency: For businesses or individuals looking to maintain transparency about their transactions, sharing a Bitcoin address can serve this purpose.
- Convenience: Sharing wallet addresses simplifies the process for two parties to transact with each other, eliminating the need for direct communication each time.
- Privacy concerns: Once a Bitcoin address is linked to a crypto trader’s identity, anyone can see the balance and transactions associated with that address, potentially compromising the trader’s financial privacy.
- Security risks: When a crypto trader publicly links their identity to a Bitcoin address, they could be a target for phishing attempts, scams, or even physical theft, especially if the address holds significant value.
- Irreversible transactions: If someone sends funds to a trader’s address maliciously (e.g., from illicit activities), they could unwittingly become involved in a problematic situation since Bitcoin transactions are irreversible and could be scrutinized.
How to track Bitcoin transactions
Websites called blockchain explorers keep track of crypto transfers for major blockchains like Bitcoin and allow traders to locate each transaction in real time. For example, on Blockchain.com, crypto traders enter their public address or a transaction’s confirmation hash in a search bar to find full details on their latest BTC transaction.
Many other websites like Blockchain.com also post feeds of the latest Bitcoin transactions for anyone interested in monitoring BTC’s latest supply and demand dynamics. Although blockchain explorers let anyone look into transactions on Bitcoin, they don’t reveal the personal identity behind each transfer.
Computers on the Bitcoin blockchain (aka nodes) also download the entire BTC payment ledger to secure the network and participate in transaction verification. Since these nodes are responsible for adding new BTC transfers to the blockchain, they have full access to historical transfer information between wallet addresses. So if people run a node on Bitcoin, they have the data to trace BTC transactions.
Are any crypto transactions anonymous?
If a cryptocurrency uses an open-source, distributed payment ledger, all the transactions are publicly viewable. However, some cryptocurrencies have unique privacy-preserving features that deliberately obscure transaction history.
For example, privacy coins like Monero (XMR) and ZCash (ZEC) use advanced cryptographic procedures like zero-knowledge proofs and ring signatures to hide transaction details on their peer-to-peer (P2P) networks.
Some crypto projects offer optional privacy features—such as Litecoin’s (LTC) Mimblewimble protocol—which give traders a choice to obscure a crypto transfer. Due to their extreme secrecy, privacy coins are some of the most controversial projects in cryptocurrency, and some countries and crypto exchanges no longer offer them due to security and privacy concerns.
Are crypto exchanges anonymous?
If a cryptocurrency exchange uses know-your-customer (KYC) policies as a part of its signup procedures, it has access to the personal details of every trader on its platform. Many centralized exchanges (CEXs) use KYC to comply with regulatory standards for anti-money laundering (AML) and counter-terrorism financing in the jurisdictions where they operate. National government authorities and international organizations like the United Nations (UN) often work with these CEXs and request access to user info if they detect suspicious cryptocurrency transfers.
Decentralized crypto exchanges (DEXs), however, often don’t have the KYC requirements found on CEXs. On a DEX, crypto traders link self-custodial wallets directly to a blockchain protocol to execute P2P crypto swaps. While all the transaction details on DEXs are posted on cryptocurrency blockchains, they don’t always require traders to link KYC details to their wallet to start swapping, which provides traders with a more pseudonymous form of crypto trading.
Do mixers make Bitcoin anonymous?
Mixers are protocols that promise to keep each trader’s transactions private by deliberately scrambling (or mixing) a pool of cryptocurrencies before sending tokens to a wallet address. Although Bitcoin mixers make it more challenging to track crypto transactions, there are many risks involved in using these web3 solutions.
For example, due to their association with criminal organizations like North Korea’s Lazarus Group, many nations ban the use of mixing software and enforce heavy penalties for traders caught using these protocols.
Besides the regulatory risks, mixers ironically have privacy concerns, especially if these programs are centrally controlled and have access to user data and wallet addresses. It’s also possible for hacks or glitches to derail a mixer’s operations, potentially costing crypto traders all their funds.
Despite their availability and usage in web3, crypto traders must consider these risks before using mixers for additional privacy.
Does the Bitcoin Lightning Network make BTC anonymous?
The Bitcoin Lightning Network (LN) is a layer 2 application that supports faster and cheaper BTC microtransactions built on top of Bitcoin’s base (or layer 1) blockchain. Since the transactions on the LN happen between linked channels off Bitcoin’s official payment ledger, it offers an extra layer of privacy for crypto traders—but there are debates about whether the LN makes BTC anonymous.
Techniques such as payment blinding and route blinding make it possible to obscure the exact amount of BTC per transaction and the path a payment takes throughout the decentralized network. While both of these features make it harder to identify transfers within the LN, crypto traders still need to close a channel to submit their final BTC balance to the official layer 1 payment ledger.
Although development on the LN is ongoing, it currently offers users pseudonymous BTC transfers rather than an anonymous Bitcoin wallet. It’s more challenging to follow transactions on the LN, but the final payment details are viewable on Bitcoin’s public ledger, giving observers a clear glimpse into network activity and the entities behind BTC wallet addresses.
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