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Blockchain Analysis of Cryptocurrency Transactions and How To Keep Them Safe

April 7, 2022

Blockchain analysis is involves transaction analysis and fund tracing.  Cryptocurrency is any form of currency that exists digitally and uses cryptography to secure transactions. As a peer-to-peer system, no bank is involved in verifying transactions between the sender and the receiver. An online database (public ledger) records the specific transactions.

Also, no central or official institution, such as the Treasury Department’s Bureau of Engraving and Printing (BEP), issues cryptocurrencies. Instead, any person can “mine” cryptocurrencies using dedicated hardware and an internet connection. In order to ensure that only verified crypto miners can mine and validate transactions, a proof-of-work (PoW) consensus protocol must be followed. There are currently an estimated 12,000 different types of cryptocurrencies, most of which were coined for a specific purpose. Cryptocurrencies are also traded on a cryptocurrency exchange aka a digital currency exchange (DCE). There are almost 600 DCEs worldwide.

On a technical level, cryptocurrencies run on a blockchain, which describes the way transactions are recorded into “blocks” and time-stamped. As a distributed public ledger. It records of all updated transactions. The owners/users of cryptocurrencies keep their currencies in a digital wallet, which can only be accessed using a private key to prove ownership. There are two types: hot wallets that use online software to protect the private key, and cold (hardware) wallets that are offline electronic devices where the private is stored securely.

There are currently an estimated 300 million cryptocurrency users. The popularity of cryptocurrencies is rising; the projected market size for cryptocurrency is expected to reach $1087.7 million in 2026. Cryptocurrencies are popular since they enable cheaper and faster money transfers and decentralized systems that do not collapse at a single point of failure. The latter happened during the financial crisis of 2007 – 2008. For the underbanked, it allows them to access capital and make financial transactions quickly and conveniently, especially for cheaper, faster, and secure cross-border money remittances. There are, of course, also disadvantages. Cryptocurrencies are known for their price volatility, high energy consumption for mining activities, and limited acceptance for purchasing goods and services.

Due to its peer-to-peer nature that keeps translations obfuscated, threat actors use cryptocurrencies to buy and sell illicit goods and services on the dark web and to finance terrorist activities. Fraudsters abuse the popularity of cryptocurrencies to promote virtual Ponzi schemes and other scams to trick people into giving them money. Although cryptocurrencies are well-protected since the digital ledgers of cryptocurrency transactions are hard to tamper with by people without a specific private key. This did not stop threat actors from successfully breaching and stealing the equivalent of millions of US dollars. To illustrate, the Ronin Network was hacked in March 2022. The culprits stole around $625 million in cryptocurrency from Ronin Network’s blockchain, making it the largest crypto heist ever recorded. The legitimate owners of the breached crypto wallets might be left without any recourse. In many cases in the past, a victimized exchange or operator of the cryptocurrency did not have enough reserves (in contrast to traditional financial institutions) to compensate the victims.

To trace such culprits, a blockchain analysis is needed. Although peer-to-peer and encrypted, blockchain transactions can still be traced since they leave digital footprints behind. With a blockchain analysis, an investigator can detect, categorize, and model these digital footprints to get key information about the threat actors that performed the illicit transactions. Since blockchain analysis is often part of a dark web investigation, it is necessary to constantly identify the technical details of online activities, behavior, and other relevant information. With a tool such as the AI-powered WEBINT platform of Cobwebs, investigators can connect threat actors to illicit blockchain activities by uncovering hidden identities. The tool’s AI and smart algorithms adapt to the latest blockchain and cryptocurrency industry services and platforms, as well as digital wallets.

In the case of cryptocurrency-related dark web investigations, the platform also enables investigators to scan the dark web-based on specific search terms or phrases without the need to access the dark web themselves. This eliminates the need for them to personally explore the dark web by accessing dark web websites, forums, message boards, and other publicly accessible dark web sources. The platform uses AI-based dark web scanning technology to connect the dots in a visual graph and gives actionable insights in the form of automated reports that can be used for follow-up.

Stephen Lerner

Stephen is an intelligence team leader at Cobwebs Technologies. He trains clients around the world on the use of Cobweb’s proprietary open-source intelligence platforms, and on the field of OSINT and WEBINT in general. In particular, he enjoys researching the psychology of intelligence analysis.



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