[Karunamon]

Okay, maybe I'm not understanding something.

Since you can generate unlimited wallets, lets say I have two, A and B.

Wallet A is known to belong to me. Coins I buy off of Mt. Gox end up in this wallet.

I create wallet B, and then send coins to it.

Using wallet B, I then send coins to a hosting company's wallet for for a server.

The fact that I sent coins from Wallet A to Wallet B is public information. The fact that I own wallet B is not public information.

If I was a government type trying to trace someone down, how would I prove who owns wallet B?

Let's assume I generate a new wallet every time I pay for hosting when the bill comes due. The path is even murkier.

If I was really paranoid, I could create wallet B, hop on Tor, make a post on a bitcoin board somewhere selling some kind of non existent goods, posting my Wallet B address for payment, regenerate my Tor circuit, post as another account on the same board indicating interest in these goods and post my wallet A address.

How does this look to any observer like anything but some guy sending coins to some other guy who ends up using those coins to buy hosting, or any other good or service?

[sp332]

If someone buys something illegal, and the cops look up the transaction in the bitcoin network, it narrows things down to just a few wallets where the funds might possibly have originated. If they look back a few links in the chain and the find bitcoin exchange where you initially got the money, they now know that you exchanged just the right amount of money to make the illegal purchase. It doesn't take much work to put 2+2 together.

[Karunamon]

>it narrows things down to just a few wallets where the funds might possibly have originated.

This can be defeated, either manually or via a tumbling service to make the link chain so huge as to be useless for evidence purposes.

Again, it's easy to link me to wallet A assuming I just buy from a service with links into the traditional financial system. It's significantly harder to prove I own any of the wallets I send money to.

>If they look back a few links in the chain and the find bitcoin exchange where you initially got the money, they now know that you exchanged just the right amount of money to make the illegal purchase.

This could be defeated by sending more than the amount required when you fund the second wallet.

Again, nobody knows that I own wallet B. Given a sufficiently plausible public exhibition on a trading site, it may look entirely like it's owned by another person outright, and if your goal is to avoid legal scrutiny, so much the better.