With the price of Bitcoin exceeding that of the median price of a new car in the United States (which you should never pay so you can invest more into crypto), there’s more than enough incentive for bad actors to come in and muck things up. Good for us though, Satoshi and other innovators of blockchain produced built-in protections against bad actors. Still, can Bitcoin be counterfeited?
It seems like Bitcoin could be counterfeited
All Bitcoin really is, is a few lines of code living on a piece of hardware- and not an even necessarily sophisticated piece of hardware- if you think about the hardware wallets of today. So it should be relatively easy to go in there and modify some of those lines of code to change your account balance, right? This may be true with current centralized finance and bank databases, but in blockchain it isn’t so simple. What the Bitcoin network really is is a network of consensus among thousands of computing nodes. If you were to ‘mint’ your own Bitcoin on your computer, you would have to announce that transaction to the network. The network would see that the Bitcoin did not come from anywhere- who did you get it from who was already on the network? Bob didn’t send you any- and neither did Alice (or any of the other 70 million wallets). Therefore, it might be a bullshit transaction. Every node on the network more or less needs to agree that they witnessed you receive the Bitcoin from somewhere. The only time Bitcoin is minted is when a node wins the hashing lottery- and many of millions of other nodes witness that.
Possible ways of ‘counterfeiting’ Bitcoin
Now let’s get down to the ways the network really is vulnerable.
The 51% Attack- much like the name implies, if your Bitcoin mine controls more than 50% of the computing power on the network, you could fake transactions and when the blockchain forks your fork will be the winner because of the majority rule. This is easier said than done. Let’s say you had all the computing power you needed for this- still in 2021 you would need the amount of electricity it takes to power Norway for one entire year to control 51% of the Bitcoin network for that time period.
The Race Attack- blocks (entries) being added to the ledger (think a big excel spreadsheet) do not happen instantaneously. Thus, there are ‘dark periods’ when transactions happen and then they are verified. If you’ve ever experienced the thrill of sending thousands of dollars of your crypto from one of your wallets to another, you probably know this period too well. A race attack means sending two conflicting transactions in rapid succession to the Bitcoin network.
The Finney Attack- this involves a mining node that sends a transaction to itself. When the mining node is awarded a block, the node sends those coins to another party for a good or service. After the other party accepts the payment and irreversibly provides the goods, the node releases the new block that only says the node sent the Bitcoin to itself- this overrides the transaction with the other party who provided the goods.
Early in its existence, Bitcoin did suffer from attacks like this, but the strength of the network has improved. The best alternative to success is to fail quickly, and time has allowed the Bitcoin network to become more and more bulletproof with its past mishaps. The truth is that the Bitcoin network is far less vulnerable to manipulation than proof-of-stake networks. If we had a cryptopocalypse complete with nukes and zombies, my money would be on Bitcoin to survive.
Source: Finance Monthly
The proof-of-work approach is unsinkable
But not the same way the Titanic was. In that the Titanic was sinkable? I don’t know. The thing you need to know about proof-of-work is that it makes it extremely economically expensive to manipulate the blockchain. As in, you would need to go spend $400 million on building a massive facility right next to a hydroelectric power plant in Brazil in the middle of the Amazon rainforest, and then spend another $200 million on mining hardware, and then spend $5 million/month on electricity just to have a chance of winning the Bitcoin PoW lottery enough times to stage a 51% attack to falsify the ledger. The same reasons that make Bitcoin less than environmentally friendly make it a far safer alternative to centralized banking. Proof-of-stake, on the other hand, allows ordinary users like you and me to earn rewards but is more susceptible to manipulation. All someone needs to do is own 51% of the coins of that crypto to create false transactions all day long. If you think about Polkadot with its $30B market cap- $15B may sound like a lot, but what if a throng of rich investors got together and decided to make themselves rich? It’s not hard to imagine this type of behavior- we have Enron, credit default swaps, and numerous Ponzi schemes to recall financial malfeasance.
You can’t ban crypto
Imagine a world (it wouldn’t be too hard) where all of the central banks from all the world’s nations got together and decided that Bitcoin needed to be outlawed. Great powers rarely like to give up their control of interest rates and monetary supply to achieve the economic and social outcomes they want. Guess what? You can’t ban crypto.
While we’re talking about counterfeiting, let’s also talk about what would happen if people tried to do away with blockchain technology all together. Why is crypto such a big deal? Transactions, records, and layers of middlemen have not kept pace with the digital transformation we’ve seen over the last 30 years. Your local bank is able to stay in business and afford its branch manager some nice suits because it pays 0.3% on savings accounts and lends money out at 7%. Enter blockchain- a way to provide cheap, efficient, immutable, and secure transactions and record-keeping. Such a drastic innovation challenging such an entrenched and heavily lobbied industry is sure to make the future interesting. Since blockchain is a decentralized ledger across millions of nodes- if a ban were attempted and nodes were removed, more computers would simply pop up on the network. To get rid of crypto, you would have to completely get rid of the internet- and no state, corporation, or even individual has the foolishness to do that.
Attacks might happen, but don’t worry
Most attacks are going to go after large actors like institutional investors or Bitcoin OGs who hold hundreds of millions of dollars worth of Bitcoin. The chances of attack on large cap coins like Cardano, Ethereum, and Bitcoin are likely just as small as the chances of your local bank suffering an attack. While the FDIC does insure banks- it only does so on individual accounts up to $250,000. Still, my thesis is and will be for a while that you should only invest into crypto what you’re willing to lose. A technology as small and as innovative as blockchain is sure to have some stumbles along its way to global adoption.