Can People See How I Spend Bitcoin?

• Yes, bitcoin transactions are traceable. Each transaction is recorded on a permanent publicly available ledger known as the blockchain. 

• Bitcoin is not anonymous; it is pseudonymous. Your bitcoin wallet address is essentially an alias used to make transactions on the bitcoin network.  

 
One of the biggest myths surrounding Bitcoin and other cryptocurrencies is that they are used mainly by criminals to fund illicit activities, due to the perception of anonymity. Appointed officials in the U.S. and abroad have made statements tying cryptocurrencies to criminal activity. However, annual reports from Chainalysis, a blockchain data platform, find that illicit activity accounts for less than 1% of all cryptocurrency transactions, a statistic backed up by reports from the compliance firm Elliptic in 2020. 

 
Most criminals prefer cash to crypto for illicit trades and money laundering because it is difficult to trace. Cash passes from hand to hand, and there is no paper trail left behind. In contrast, Bitcoin is easy to trace.  

Can Bitcoin be Tracked? 

While bitcoin can be minted, moved around, and stored without the oversight of any central authority like the government, each bitcoin transaction is recorded on a permanent publicly available ledger known as the blockchain. 

You can go on a blockchain explorer right now, type in your wallet’s public address, and see every transaction you have been involved in. You can even trace the transactions of the wallets associated with your wallet, as one enthusiast did when he traced the transaction history of the bitcoins used in the very first real-world bitcoin transaction, where 10,000 bitcoins were traded for 2 large pizzas, and found that they have spread out to millions of wallets. But it’s important to note, the blockchain only stores the public addresses of crypto wallets, not real-world identities. This makes bitcoin pseudonymous rather than anonymous. Your bitcoin wallet address is essentially an alias used to make transactions on the bitcoin network.  

Bitcoin and Anonymity 

Despite being one of the most transparent payment networks in the world, Bitcoin was designed with privacy in mind. It is anonymous in the sense that you can hold a wallet address without revealing your true identity with that address. In the original Bitcoin whitepaper, inventor Satoshi Nakamoto suspected that wallet addresses could be used to link transactions to a common owner and recommended that users use a new address for each transaction to provide acceptable levels of privacy.    

While the Bitcoin network operates outside of the purview of regulators, crypto service providers like exchanges do not. This means that most of these services are required to implement some degree of know-your-customer (KYC) solutions as a way of linking a real-world identity to bitcoin addresses and transactions.  

So, if you have a bitcoin wallet that has never been used, it is still totally anonymous. But, if you have ever submitted any KYC documents when buying or selling crypto, then your identity is in fact linked to those coins in some way.  

How Authorities Track Bitcoin Criminals 

Standard blockchain explorers like the one linked to above work well for tracing legitimate transactions, but these tools are not ideal for tracing suspicious transactions because successful criminals to go to great lengths to obfuscate their trail.  

To trace suspicious bitcoin activity, law enforcement agencies might partner with blockchain data platforms like Chainalysis. These investigations usually start with digital breadcrumbs left behind in cyber hacks or online scams, like the Javascript specifications for the browser they launched their attack from. These clues are then used to track down a wallet's owner by analyzing the criminal's past internet history and cross-referencing with KYC information from crypto exchanges.  

There have been several examples of law enforcement agencies tracking down vast sums of stolen bitcoin. In February of 2022, the Department of Justice announced that it seized 94,636 bitcoins linked to the 2016 hack of the cryptocurrency exchange Bitfinex.  

Reaching beyond U.S. territory, the Department of Justice reported in 2020 that it used Chainalysis to trace $28.7 million in cryptocurrency stolen by a North Korean hacker group and were able to prevent them from laundering these stolen funds through exchanges. 

Through various law enforcement actions, the U.S. government holds nearly 200,000 bitcoin, making it one of the largest whales in the Bitcoin market. Former President Donald Trump and 2024 candidate Robert F. Kennedy Jr. both indicated support for using the confiscated bitcoin to form a strategic reserve. 

Bitcoin’s Place in the Financial System 

While Bitcoin is often perceived as an anonymous currency, it is, in fact, highly traceable due to its transparent blockchain ledger. This pseudonymity means that while real-world identities are not directly linked to wallet addresses, transactions can still be traced back to individuals through various investigative methods. Despite the myths surrounding its use in criminal activities, data shows that illicit transactions make up a very small fraction of Bitcoin’s overall usage. As a result, Bitcoin’s traceability and the implementation of KYC measures by crypto service providers play a crucial role in maintaining the integrity and security of the cryptocurrency ecosystem.