Is Cryptocurrency Subject to Counterfeiting? This Is The Justification

It cannot be! That is part of Bitcoin's allure – it operates on a consensus basis. Thousands of computers worldwide running the same software and following the same set of rules arrive at the same conclusion regarding the validity of a particular transaction. If one computer attempts to push a transaction that violates the rules, the thousands of other computers simply reject it, and the transaction is never recorded.

Several of these rules include the following:

  • A transaction must have a valid input that is equal to or greater than the transaction's total output. For instance, if I want to send 4 BTC for a fee of 0.0001, the address(es) from which I am sending must have received at least 4.0001 BTC in the past. Bitcoin software determines this by examining the blockchain.
  • The inputs must not have been spent previously. Bitcoin software determines this once more by examining the blockchain.
  • A block reward must be at least 25 BTC (at the time of writing) and will be halved every 210,000 blocks. Each block is required to provide a block reward.

The first two rules are intended to prevent double spending, which is essentially digital counterfeiting. If Alice only has ten bitcoins and sends ten bitcoins to Bob, she cannot later send ten bitcoins to Charlie, as the rest of the Bitcoin network will simply reject the transaction, recognizing that Alice already sent the ten bitcoins to Bob.

The final rule prohibits the creation of more bitcoins than the network has already agreed upon. Satoshi Nakamoto first defined this rule in his original implementation of the Bitcoin software, and it ultimately limits the total number of Bitcoins created to 21 million, spread over approximately 130 years. If a miner created a block with a reward of 26 bitcoins rather than 25, the rest of the Bitcoin network would simply reject it in favor of the next new block that followed the rules.

All of this demonstrates that Bitcoin cannot be forged. Having said that, there are still ways for individuals or businesses to deceive themselves into believing they received bitcoins when they actually did not.

As documented here, one such trick was successfully used to steal "bets" from an online gambling service called Satoshi Dice. Notably, only services that provide instant results (for example, a download service or certain types of online gambling) and require no confirmations are susceptible to this type of trick or abuse.

Another trick, albeit extremely complex and difficult to execute, is to disable a merchant's external access to the Bitcoin network and then broadcast a transaction exclusively to the merchant. The merchant would receive payment, but the transaction would not propagate across the Bitcoin network and would not be permanently recorded until the merchant's network access was restored. Meanwhile, the thief could simply send the bitcoins to another address that he or she owns in order to recover the coins before the merchant's network access is restored, and the coins would never reach the merchant. Ultimately, if a person possesses the skills necessary to disable a merchant's internet access without the merchant being aware, they will likely find more convenient ways to steal money.

The bottom line is that Bitcoin cannot be counterfeited, and any related trickery that is possible is extremely limited in scope and requires a high level of skill to execute.

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