There’s a looong discussion about bitcoin’s traceability in this thread starting about post #50.
@HMS_Irruncible will tell you that in a perfect, abstract world bitcoins are untraceable, and if you insist on using them in the real world, that your problem. 
TL;DR Bitcoins are often traceable at the point you buy or sell them for dollars at an exchange. Sophisticated software also exists to analyze the blockchain and trace complex movements of bitcoins through multiple intermediate wallets. There have been a number of cases where bitcoins were successfully tracked down and criminals arrested.