This is not a perfect analogy, but to give you a simplistic analogy of what Bitcoin mining is like.

Take something that we're all familiar with--lottery tickets. A lottery ticket has a series of numbers on it. Imagine a Bitcoin as a digital lottery ticket with a unique set of numbers on it. According to the Bitcoin rules, only one lottery ticket can exist with that particular set of numbers.

When you "mine" Bitcoins, you're essentially just selecting a new set of numbers for a new lottery ticket, but before that ticket is considered valid by everyone else, the Bitcoin protocol requires that you have to put in some "work". Around the world, there are public lists of all valid Bitcoins and information about them, like a history of transactions, so it's like every lottery ticket ever issued is listed and publicly accessible. Say the work, or mining, involved multiplying all the numbers on every lottery ticket in existence. Obviously, as the number of lottery tickets expands, so does the amount of processing power required to finish the necessary "work". Once you have finished the work, your new lottery number is then distributed to all the servers and anyone who tries to claim that number in the future will be rejected.

Very, very simple analogy.

In the beginning, it didn't take much work to generate a Bitcoin because not many existed but now the work is beyond the horsepower of typical home PC's. That's why there are companies selling specialized hardware that are optimized for blazing through these Bitcoin calculations. There are whole data centers out there devoted solely to Bitcoin mining. As the number of Bitcoins increases, the work requirement acts as a feedback mechanism that slows the growth of the Bitcoin supply. There is also a hard maximum number of 21 million Bitcoins that can ever exist but we're still a long ways from reaching that limit.

When you "spend" a Bitcoin, you're just transferring ownership of that lottery ticket number from you to another person in a way that all these public servers are notified. So, you can't just reuse the same lottery ticket number over and over because the public registries have recorded that you don't "own" that lottery ticket anymore. It's like buying or selling a house. When you buy a house, you do a title search to make sure the seller owns the house free and clear and then you register the transaction with the appropriate government agency in your name.

You can even split one Bitcoin into fractional ones. It's mostly a bookkeeping thing with the public servers, so you can "spend" a tenth of a Bitcoin and still have nine-tenths of it remaining in your possession.

In terms of the value of a Bitcoin, think of them like stocks. They are constantly being bought and sold on exchanges and the prices varies as the supply or demand varies. The price swings can be very quick and dramatic, which scares many people but you can also make a killing in a short time if you get the timing right.

Hmmm, that sounds more like a Bank printing currency than a miner mining gold. A gold miner has a hard metal result for his labor; a bitcoin miner has a number. Ether rather than printed paper.

So to get a "free" Bitcoin, all's you have to do is come up with a number (between 0 and 21 million) that nobody has come up with yet? That sounds trivially easy for the people who started up Bitcoin, then it gets progressively harder and harder, and more and more expensive to buy the hardware needed to do the searches, finally converging to impossible.

Doesn't that sound like a "pyramid scheme", where the early adopters rake in the cash and the poor schmucks at the end are just making the early adopters richer and richer? This is all assuming that "owning" a bunch of numbers has value in the first place.

The more Bitcoin is explained to me, the more my jaw drops in awe that people would actually, intentionally, of their own free will, buy into this. A herd of lemmings could conquer Bitcoin owners in short order.

Lets hope the power doesn't go out for these poor lemming-wanna-bes. Poof Bitcoins!

It's not a perfect analogy, so no, it's not as simple as literally just picking any number between 0 and 21 million. You're using cryptographic principles to calculate a long string of letters and numbers for this new "lottery ticket" which is the end result of the "work" you're putting in.



Actually, the real world works similarly, too. Big companies and well connected people with government contracts are paid with dollars that have been created out of thin air. Since they are the first to be paid with these dollars, these dollars have more buying power. As soon as they are spent into the economy, the buying power of every single other dollar in existence is diluted a bit more by this new dollar. This causes prices to rise, which essentially means the dollars in my pocket are worth less today than they were yesterday and we're constantly getting fleeced by inflation caused by other people being able to use all these newly created dollars first.

Essentially, the only difference between a dollar (whether paper or a digital dollar in my bank account) and a Bitcoin is that a dollar has the coercive power of the Federal government behind it to mandate its acceptance to pay debts and to ensure its monopoly as the legal tender of the country.

The global monetary/financial system is really in a precarious state now. I think it's fair to call it a Ponzi scheme, too. Seriously, the Ponzi almost crashed in 2008 but governments and the big banks moved heaven and earth to prop it up and keep the house of cards from falling. I consider it a Ponzi because new money in the form of new debt MUST be continually be injected into the system or it WILL collapse.

And before someone points out inaccuracies in my explanations, it definitely does NOT accurately explain the details of Bitcoin.

I'm merely trying to give a basic explanation using concepts that most people will readily understand. Like the title search comment is not technically accurate with Bitcoin transactions, but it gives you an idea that there is a process used that verifies the integrity of that particular Bitcoin that you are spending or accepting.

If anyone wants to clarify any of my explanations, please add to the discussion.

I have a few questions. This forum seems like a good source of knowledge...

1. Bitcoin stops working if there is no electricity or Internet. Is that right?

2. Bitcoin mining is scheduled to stop in 2140. But, in only about 40 years, I'm thinking computers and the Internet will be completely unrecognizable as we currently know them. Do you see Bitcoin as being a currency that depends on how the Internet currently works TODAY?

3. Bitcoins are super volatile. The exchange rate an hour ago was $486 US. At the moment (one hour later), the exchange rate is $478 US. When will the volatility stop? When more people jump in?

4. 21,000,000 bitcoins will be the max in the year 2140. At the current exchange rate, that's $10,038,000,000 US. That's not a lot of money for a total valuation of a currency. Or am I thinking about this the wrong way?

There are a number of fallacies surrounding the arbitrary limits of this purely electronic fiat currency.

1. There is no limit to the # of transactable units. Once the 21,000,000 limit is reached, but more likely much sooner than that, bitcoins will be subdivided, much like dollars are subdivided into quarters, then dimes, then nickels, and so on. Each time a subdivision occurs, there will be a resulting deflationary adjustment as subdivided units increase in value, generally the opposite of what Quantitative easing does. So if 21,000,000 bitcoins are worth $500 each and they split, does anyone think the value of half-bitcoins will be $250 for very long? If the interest in the currency remains strong, they should go up in value quickly as demand rises to meet supply.

2. There is nothing backing the intrinsic value of bitcoins. No one has any reserve set aside to cover the current or future circulation of bitcoins. Think of a bitcoin as similar to a promissory note or IOU. It is one person saying they will honor the redemption value at some later date, without actually putting up any collateral to back the statement. In the event of default, there is no asset forfeiture to rely on. The only remedy would be to take civil action against the debtor, using the legal system to compel forfeiture of assets not contractually liened.

3. Bitcoins are unregulated, there is no safeguard against counterfeit. No electronic security system is 100% reliable, and you can bet that there will come a point in time when bitcoins, like any other electronic banking transaction system, will be compromised. Thousands of people are trying to hack the bitcoin system already. At least with dollar bills, I can elect to keep them in my safe at home, or a mason jar buried out in the back 40.

4. You must have access to technology to use bitcoins for anything. You can't carry bitcoins in your pocket or purse. They aren't real. If you have bitcoins when technology fails, your bitcoins are virtually gone.

As a purely digital currency, you require computing power to create and check the integrity of Bitcoins, and you need the Internet to widely distribute the registry of Bitcoins and to record transactions so if you're talking about going long term without electricity or Internet, then you're correct, Bitcoin is out.



That's a very difficult question to answer. I would be very, very surprised if Bitcoin were still around 40 years from now. I see it more as an example to everyone of what digital currency can be.



The outstanding number of Bitcoins is still small enough that buying or selling large amounts of Bitcoins can have dramatic influence on the price. I have no idea at what number of Bitcoins would help dampen these price swings. But even Blue Chip stocks can vary in price quite a bit even over the course of one day.

A huge Achilles heel for Bitcoin has been the quality of the Bitcoin exchanges and Bitcoin digital wallets to store them. There have been some high profile and costly thefts that have given a huge black eye to the whole Bitcoin concept. Probably the most high profile Bitcoin exchange, Mt Gox in Japan, just went bankrupt and shut down, taking many people's Bitcoins down with them. Mark R linked to an article that mentions the downfall of Mt Gox and how these incidents really knock down the price of Bitcoin in a hurry. Until a more mature, robust infrastructure develops to support Bitcoin, it's still really the Wild West in the Bitcoin world now. As the saying goes, "You pays your money and you takes your chances." But things mature very quickly in the online world, so the situation could stabilize quite quickly.



Well, it depends on how you view Bitcoin's role. If someone is interested in Bitcoin as a store of value or as an investment in itself, then think of it like how you would think of gold. As interest in gold increases, the price per ounce will go up and up. What used to be worth $200 near the peak of the Dot Com bubble could later be worth $1,800 for the same ounce of gold. But I don't think there's any chance that people will be trading in Bitcoin like that 40 years from now.

However, if you view Bitcoin as a widely used medium of exchange throughout the whole country, then maybe 21 million Bitcoins is too small a number to work efficiently in that role, even allowing for fractional Bitcoins. Pricing a pack of gum as 0.00000001 Bitcoin does not seem like something people will readily embrace.

Not any different than any modern currency.

With a total fixed number of Bitcoins, it's possible that a convention could arise that Bitcoins become primarily valued in something other than currencies. Perhaps priced in terms of gold since the overall supply of gold changes slowly, too. So then Bitcoin would be a digital representation of something with tangible value (gold). You can't print more gold therefore Bitcoin would also have a relatively stable value over time, although it's price in other fiat currencies could fluctuate widely.


Actually, Bitcoin is self-regulating in terms of checking the authenticity of Bitcoins and in how fast or how many Bitcoins are ultimately issued.

Despite the high interest in Bitcoins when its price zoomed to dizzying heights, I'm not aware of any instances of counterfeit Bitcoins being successfuly passed off yet. But plenty of Bitcoins have been stolen by hacking the software behind the exchanges and digital wallets used to store Bitcoins.

Bitcoins may be self-regulating, but the value of a bitcoin does depend too much on strange factors.

For example, the version update of the Bitcoin software affects a bitcoin value. For instance, if the software is not updated properly, the system won't work properly. Then, suddenly everybody will be reminded that the nerds on the back end are vital to the system. At that moment, the value of a bitcoin will plummet.

That brings up another point. There needs to be transparency with who is updating the software. Yeah, Bitcoin is open source, but still somebody needs to be updating the thing properly, right? What if the programmers all die today? Who will take over updating the software? These kinds of questions affect value.

Also, as previously noted, the value of a bitcoin is affected by the reliability of electricity and the Internet. If the Internet goes down for just one half hour across the USA, everybody will be leaving the Bitcoin currency in droves.

I'm a bit of a conspiracy theorist. These factors I brought up give a huge amount of power to one group, the pogrammers and engineers. People keep repeating the idea that bitcoins are self-regulating. That may be true IF we assume the system works properly at all times. The programmers and engineers have the responsibility of making sure the system works properly. Thus, they have god-like power within the realm of Bitcoin.