How Bitcoin Transaction Tracking Works: BTC Payment Anonymity, Security and Privacy Guide
Many among the crypto community believe that using cryptos — particularly Bitcoin — allows them a greater level of privacy than using regular payment methods such as banks and financial institutions. While this is true, it is only true to an extent, as Bitcoin transactions are not completely anonymous. In other words, the answer to the question that more and more crypto users are asking — whether Bitcoin transactions could be tracked — is positive. However, it is not that simple. Here is how it works.
Bitcoin Is NOT Anonymous
When Bitcoin first appeared, it was a completely new payment method, based on completely new technology. As such, not a lot of people really understood how everything works, and many of the early users wrongly believed that BTC is fully anonymous.
However, this is not true. The system has special protocols in place that guarantee both transparency and security of the transactions, but not full anonymity. In fact, the blockchain on which Bitcoin operates keeps track of all activities, including notes on transactions that users make.
Simply put, privacy is never complete when it comes to the blockchain. Instead, users can only ever achieve pseudo-anonymity or pseudonymity. In other words, you can keep your identity private as long as you do not reveal yourself somewhere, and make a connection between you and your public key.
When you use a Bitcoin wallet, you get a special address that can be used for receiving and moving cryptocurrencies. These addresses look like random combinations of numbers and letters, but your wallet address is unique, and it belongs to you. This means that you can use it anonymously for as long as the address is not connected to your personal details, such as name, email, and alike.
This is important because handling over a wallet address means handing over your entire transaction history. When someone knows it, it can see all of the transactions you ever made by using that wallet.
However, this address will likely not remain anonymous for long, and sooner or later — you will have to compromise it. Whether you create an account in an online shop that accepts Bitcoin and you make a payment, or you create an account on an exchange in order to be able to trade, before long, you will reveal yourself to the world, and people will be able to connect the address to your identity.
How Can Transactions Be Tracked?
While anonymity and confidentiality are very much desired by most crypto users, the fact is that too much of this ‘freedom' can have negative consequences. While you may want to use your cryptocurrencies in a perfectly legal way, and you simply do not want the world to know about it — this is not always the case with others. In fact, cryptos were connected to a number of illegal activities over the years, particularly back in the day when Bitcoin was still believed to be fully anonymous.
The Silk Road is one of the best-known examples of how bad actors can misuse cryptocurrencies. And, while they would undoubtedly find a way to use other types of assets for such purposes, the fact that they turned to cryptos had a serious impact on the cryptocurrencies' reputation.
Suddenly, everyone who was anti-crypto started using this example to connect Bitcoin to crimes, funding of terrorists, drug trafficking, and more. Eventually, the FBI got involved, using blockchain analysis software and other publicly accessible clues to determine the identities of criminals who misused cryptocurrencies. While tracking transactions are nowhere near easy, it is still very much possible for those who know what they are doing.
Eventually, tracing payments allowed the authorities to disrupt a number of different criminal actions. Government and private agencies alike are now tracking them to disrupt money laundering operations, and as a result, crypto businesses are now forced to comply with KYC and AML procedures.
While this may seem like the invasion of privacy, it is considered necessary in order to stop criminal activities. Meanwhile, Bitcoin users themselves can find this useful, as they can spot suspicious transactions in real time, and avoid dealing with individuals known for scamming other users. In other words, blockchain analysis tools and transaction tracking is necessary, not only to disrupt large criminal operations but also to help keep crypto users safe.