Trace the other end of a bitcoin transaction

Question

What possible ways/methods that someone with a lot of resources can track the location of the person on the other side of a bitcoin transaction?

Answer 1

First of all I am assuming only Bitcoin. The user in question has taken no further steps to conceal their identity such as a VPN. I will also assume you received their public key (wallet address) in an entirely anonymous manner (because otherwise this becomes an entirely different question).

Bitcoin wallets are effectively random numbers. When you send bitcoin to another wallet all you need to do so is their public key. They do not need to be online to receive the transaction - the system just records it in the ledger as now belonging to them. If the public key is the only information you have and there are no further transactions from their wallet then you have no way to trace them.

However we have to assume you are paying the guy for a reason. And that he isn't going to want to leave that bitcoin in that wallet forever more. Which means he has to move it - and this offers several avenues to trace him.

First of all to move the bitcoin he would have to transfer the money elsewhere. This is going to be visible in the ledger and you can trace the path it takes. Historically tumblers could be used to conceal transactions by mixing hundreds of users currency up through dozens of wallets in randomized amounts but with the current fee level (~$20 per transaction) this has today become nonviable unless we are talking about extremely high value amounts.

The user is also going to have to broadcast the transaction to the network - which if no other protections are taken can reveal his IP.

If he wants to convert the bitcoin back to traditional currency then any legally operating exchange in most western countries (bitstamp, coinbase/GDAX, Kraken etc.) will have to identity verify him to comply with money laundering laws. A legal body could compel the exchange to hand over the identity of the customer.

Finally if he pays someone else you can use the above approaches to trace them under the hope either they are aware of his identity or he has obtained their public key via a traceable channel.