Bitcoin is a form of digital currency that uses cryptography to create and verify transactions of the currency. All the transactions that take place using bitcoins are put together into ‘blocks’ using a mathematical formula and those blocks in turn are linked to one another forming a sort of chain. Hence the ledger which holds records of every Bitcoin transaction ever made is called the Bitcoin Blockchain.
That essentially means that all the transactions with Bitcoin are on a public ledger for everyone to see and there’s no anonymity to it. While all the transactions indeed are public, it doesn’t necessarily mean that you can trace back the source of a Bitcoin deposit to determine the identity of the person. Bitcoin addresses do not require the identity or the actual address of the person to be made. Not even their IP address.
How can the source of a Bitcoin transaction be traced back to its source then? Well, it depends on the user. The most common way the ownership of a Bitcoin address is revealed is that you post about it on a public forum. If you write a personal blog with your real name and are asking for donations on it with a Bitcoin address provided, it’s a no brainer. It can also be found out if you launch a website with your Bitcoin address and the domain for your website is registered in your domain.
Another way the source of Bitcoin transactions can be found out is if you register with a currency exchange that deals with fiat currencies. Any such exchange is subject to regulation pertaining to money laundering and subsequently requires individuals dealing with it to provide their identities. Any incoming or outgoing Bitcoin transactions from the exchange will be associated to you.
If you purchase any goods and pay for them using bitcoins, there’s a way your physical address will be traceable. Of course after buying a product online, it has to be delivered to you. The Bitcoin address that you used will then be able to be linked with your physical address. This isn’t the case if you’re purchasing downloadable digital content.
Your ISP can determine your identity if you don’t use a VPN. Since Bitcoin doesn’t have any in-built encryption in its peer-to-peer network, whenever their client broadcasts any transaction over the network, it goes through their server in plain text. Your respective ISP can intercept and analyze this data and easily find out those transactions originating from your IP address. Once your IP address is determined, your ISP can look into its records where you’ve registered for their service and find out your identity.
Then of course there is hacking. It doesn’t matter if your Bitcoin address was logged only by a single merchant, server or exchange, it has been logged and there’s a likelihood that it won’t stay that way. Servers are always susceptible to hacking (depends on their security protocols). Also, depending on what for, law enforcement authorities can use subpoenas to force any of these to release information pertaining to your records.
It’s actually better not to partake in any transaction due to which you should feel the need to hide your transactions but if you absolutely have to, you need to be smarter about it and use VPNs and Tor.