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Say FBI arrested a guy who bought some drugs using bitcoin. Then, is it possible for FBI to trace a drug dealer using the arrested guy’s PrivateKey and his transaction histories?
If my understanding of bitcoin algorithm is correct, this is impossible since PublicKey only shows that “there is a user with this public key” and it does not give any more information about a user who owns that PublicKey.
Moreover, transaction that the dealer and the arrested guy made only shows public keys.
Can one trace someone using past trasactions?
Knowledge about his addresses and transaction history will be sufficient to discover addresses with which he made deals. His Private key will not help. This is the consequence of public ledger.
The different case is with deterministic wallets. When you know master private key/ mnemonic seed you can check all derived addresses, even the ones you have no previous knowledge.
From the drug buyers address the FBI can follow the outbound transaction(s) to see the drug dealers bitcoin address(es). Then analytics can provide the group of other addresses belonging likely to the same drug dealer. Then they follow all outbound addresses of this address group until they find one or more paths to exchanges where the dealer might have cashed out. There they might get id information or if they're fast they might be able to freeze some of the drug dealers bitcoin fortune even if they don't know the id. Tracing technology did big steps in the last years so for a few dollars even private people can get access to databases able to trace bitcoin addresses to exchanges.
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