Bitcoin Laundry Services Explained
Bitcoin is pseudo-anonymous. If someone knows your wallet address, they can query the blockchain and analyze the trail of wallet transactions to understand your spending and income behaviour.
If complete anonymity and privacy is desired, then use of private coins such as Monero are recommended; otherwise Bitcoin laundry/mixing/tumbling services are available.
WHY USE A BITCOIN LAUNDRY SERVICE?
Some are regular users who do not engage in illegal activities and would like to remain anonymous. Others are cyber criminals who are laundering their Bitcoin before exchanging them for fiat currency such as USD and EUR. These cyber criminals may have been involved in ransom, hacks, drug trafficking or other illegal activity.
WHAT IS A BITCOIN LAUNDRY SERVICE?
Bitcoin laundry services is an external mixing service to render your coins anonymous.
Typically, a user of a Bitcoin laundry service will send his “dirty” coins to a deposit address, and will be allowed to withdraw the “clean” coins to the destination address(es). Fees charged for laundry services can range from 1%-5% and the cleaning process can be range from a few minutes or hours depending on the level of anonymity required.
The “cleaning” process is such that the dirty coins are sent out to hundreds of addresses over randomly scheduled transactions of random amounts before randomly arriving at a specified destination address(es). In this manner, the trail between the coins from the “deposit” address and the “source” address is obfuscated.
Looking at the graph above, each node is a different wallet address. Node 1 is the destination address of interest. We can trace all the transactions to Node 1 and see that it came from 11 different wallets, and these 11 different wallets were receiving and transmitting coins to and from many other different wallets. This analysis depends on the “depth of transactions” or number of “hops” to trace the funds back to the original address. The figure indicates that it can be confusing and difficult to trace Bitcoins that have been sent through a mixer, but not impossible. There can be as many as thousands to ten thousands hops for a large transaction that has gone through a bitcoin mixer.
An Honorary Senior Fellow at the University of Queensland with professional experience as a quantitative researcher for BlackRock and Bank of America Merrill Lynch in New York, USA. He led research teams in the development of capital models, securitized products and factor models in both equities and fixed income asset classes. Rand has several academic publications in cryptocurrency, portfolio management, systemic risk & quantitative trading