Wouldn’t you like to think that your money is safe? That it’s something that can’t be forged?
Would it bring you peace of mind knowing that bad actors, big or small, can’t “mess with” your crypto?
Well, if you own Bitcoin, then I’m happy to tell you that this is the case. At least for now. But why exactly is it so hard to forge or duplicate currency in today’s digital world?
To answer this question, we’ll explore what makes Cryptocurrency so unique and special, compared to other forms of money.
How it used to be
Remember old western movies? The dusty outlaw walks into the bar. He slams a coin down on the bartop and demands a whiskey. The tired barkeep looks him up and down, and begrudgingly sets a bottle on the counter.
What happens next is the important part. The Bartender picks up the coin and bites it.
He wants to make sure it’s not soft. This is because forgeries and currency copiers were everywhere!
They used to make fake gold coins out of lead (a much softer metal), coat them with a thin layer of gold and try to pass them off.
People are still doing this with dollar bills.
It’s a problem that bitcoin and cryptocurrency has solved.
What Is Bitcoin, And How Does It Work
Bitcoin is a currency that can be transferred from one person to another without someone in the middle.
No paypal, no square, no cashapp. Just wallet to wallet. Like cash, but digital.
A copy of every transaction is stored on every computer (mainly the noose operators).
This way, everyone can verify who has what.
When someone sends bitcoin to another person, everyone knows how much and when.
This term is called “immutable ledger” meaning a record that can’t be changed.
When we have a record that can’t be changed we can use it as factual.
Who is in charge of bitcoin?
- Bitcoin is a digital currency – its decentralized
That means nobody owns it. We all share.
There’s no central authority such as the Federal Reserve in charge of bitcoin production and transactions.
Instead, the network is maintained by miners who are compensated with new bitcoins, which then helps maintain its security.
There are more than 16 million bitcoins currently in circulation, with an additional 25 being created every time a miner completes a block for the blockchain (which happens about every ten minutes).
- The blockchain is an open ledger that records all transactions
This openness allows anyone to verify the validity of a transaction independently. Moreover, because it’s replicated across such a large number of nodes in its network, no one can alter or change any single bitcoin without having to be detected by everyone else on the network.
- We have the entire history of bitcoin transaction on the blockchain
Each block contains the hash of the previous block and a timestamp
Blocks with invalid transactions are called “orphans” and will not be accepted into the blockchain. This prevents malicious users from filling up blocks (and slowing down the network) with tons of false or duplicate transactions, which would needlessly consume processing power.
Bitcoin mining difficulty increases as more miners join the network, meaning it takes time for new coins to be mined. The amount of computation needed also depends on how many people are trying to mine at once. If there’s too much competition, then each miner has less chance of successfully mining a coin before someone else does.
- It’s impossible to forge Bitcoin because each transaction has its own signature, which can’t be replicated even if you know the private key for that transaction
This is because a signature doesn’t just serve as proof that the transaction was created by its sender but also as an encrypted message from one person to another.
The signed part of bitcoin transactions can be decoded using the private key for that transaction.
If you don’t have the corresponding private key, then it’s impossible to generate a valid matching public address and signature – which means there would be no way for anyone else to send bitcoins out on your behalf or even spend them once they’re received.
But how are new bitcoins created?
This transfer happens through “mining,” which creates new bitcoin and adds it into circulation, or digitally exchanging two existing bitcoin (for example, purchasing goods). Mining allows people who have powerful computers to solve algorithms; when they find solutions, their bitcoins are added as part of the general ledger.
Bitcoin has been around since 2009, and there hasn’t been any fraud.
Why is that?
It’s because the blockchain, an open ledger of all transactions, contains blocks with hashes (or identification codes) from previous blocks.
You can’t forge it because of the way Bitcoin was designed. Forgery has been a problem since day 1 of money and Satoshi Nakamoto wanted to solve this problem.
He successfully did but using computers and public ledgers.
What an exciting time to be alive!
If you like learning from me, checkout my business school.