If you’re into cryptocurrency trading, you’ve probably seen hundreds of articles over the past few years relating to Bitcoin. You may even be familiar with the name Satoshi Nakamoto, the mysterious person credited with inventing bitcoin. But one of the challenges Nakamoto had to overcome with digital money is protecting against counterfeiting.
Let’s step away from cryptocurrency trading for a moment and consider a picture of your daughter that you want to email to your parents and your aunt using your Gmail account. The file is sitting on your computer. You upload the file to Gmail, and your parents and aunt get it. They each save it to their hard drive.
When you think about the picture you shared, there are now digital copies of the picture on your computer, on the Gmail server, on the server that your recipients use, and on your parents and aunt’s computer. We’re not up to cryptocurrency trading yet, but can you see where we are getting at. We have one digital file, and now it is sitting on four computers plus some email servers.
Now, instead of a picture you were sending, imagine that was a digital dollar bill you sent. The digital dollar would be worthless because it can be copied. Which brings us to the blockchain, as you can see in this video. Without the blockchain, there would be no cryptocurrency trading of any kind.
The blockchain is simply a database that exists on all computers that are part of the network. Technically, they call it a distributed ledger, which basically means that bitcoin owners have a database that sits on their computer with a record of the location of every bitcoin in the world. Cryptocurrency trading works because every time someone trades a coin, there is a record kept on every computer.
The system is closed, so no one can add new bitcoins into it. You can try cryptocurrency trading all day and night, but you will never be able to collect more than the 21 million bitcoins that were initially created. Some of those coins, incidentally, haven’t been mined yet, so they will eventually be added into circulation and available for cryptocurrency trading, but coins can’t be duplicated or added into the blockchain.
Going back to the emailed picture with five digital copies, the blockchain would prevent it. Say you wanted to send half a bitcoin to your father, your mother and your aunt so that they can all get started with cryptocurrency trading. You would go to each family member’s wallet, and directly send the half a bitcoin you are giving to them.
The blockchain record on every connected bitcoin blockchain would show that your account decreased by one and a half bitcoins, while the accounts belong to your father, mother and aunt all increased by half a coin. They could all then get involved in cryptocurrency trading, by heading to a cryptocurrency trading exchange, and buying altcoins with their bitcoin. Incidentally, this would trigger numerous reactions in blockchains for each coin that is being traded.