Help with understanding the logic behind Mining.

[Ryan Rudolph]

Hey everyone,

Just wanted to know the point of mining. I suppose I don't follow the logic of why Bitcoin needs mining.  Isn't mining the equivalent of printing free money with a traditional currency?  The question is how does Bitcoin hypothetically hold its value if anyone and everyone is free to mine their own Bitcoins? Because isn't mining harvesting new currency?

Any clarification would be useful.

Thanks.
Ryan

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[DeathAndTaxes]

Mining is what gives the currency value.
Mining prevents double spends.
Without mining anyone could spend their coins double, triple, infinite number of times.

Yes mining does expand the money supply but Bitcoin is growing faster than that expansion.
The rate of inflation also will continue to decline eventually reaching 0% in 2033.

[Ryan Rudolph]

Thank you for your response Death And Taxes. I need to explore some of your thoughts a bit more if you do not not mind:

"Mining is what gives the currency value."

Mining gives currency value. okay, so are you suggesting that adding new BTC to the money supply adds value because new people are using the currency itself right? Because with traditional currency, one of the variables to determine value is how many people are using the currency itself right? so are you suggesting that because the miner is using the currency, that the currency increasing in value?  or is it the very act of mining itself that increases value?

"Yes mining does expand the money supply but Bitcoin is growing faster than that expansion."

Are you suggesting that because people are buying and selling Bitcoin using traditional currencies that this is what is causing the expansion to be faster than what is coming from mining?

The rate of inflation also will continue to decline eventually reaching 0% in 2033.

Now, with traditional currencies, we are taught that some inflation is good.  If by inflation, we mean that as the money supply naturally grows, the price of goods and services increases with it, but so does wages in relation, hypothetically anyway. Now, I suppose I am trying to visualize what would cause BTC inflation to reach 0%, are you able to elaborate, as these are not easy concepts....

[pieppiep]

You can compare it with printing money with a printer, but the printer is a very special magically printer that only prints one block of 50 bitcoin every 10 minutes.
When other people decide to use a similar printer the printer knows of the other printers and only one of them prints a new block of 50 bitcoin each 10 minutes. (on average)
You can improve the change your printer prints the next block by using a faster miner but still there's only one block each 10 minutes.

[Ryan Rudolph]

Hello pieppiep.

The printer metaphor is very helpful. what you seem to be suggesting is that the creation of new BTC is at a very fixed rate, which is fairly slow, which should act has a hedge against inflation. The question then becomes, so if I convert existing currency into BTC, where are the bitcoins coming from? From BTC that was mined at some point? Another question emerges, where if the supply is not growing fast enough to meet the demand for BTC? could you hypothetically have a waiting period for BTC?

[pieppiep]

The BTC you want to convert your currency to needs to be mined by someone who is willing to sell them to you for that price.
If the demand is growing faster than the supply the price would go up just like any other currecy or product.
If many people (more than the supply can handle) want to buy dollars, the price of a dollar goes up.
If many people (more than the supply can handle) want to buy oil, the price of oil goes up.
If many people (more than the supply can handle) want to buy toiletpaper, the price of toiletpaper goes up.
If the price of bitcoin goes up from 4 dollar to 40 dollar but you don't want to spend more than 4 dollar your waiting time is the time it takes for the BTC to drop again and reach the 4 dollar.

[DeathAndTaxes]

Hello pieppiep.

The printer metaphor is very helpful. what you seem to be suggesting is that the creation of new BTC is at a very fixed rate, which is fairly slow, which should act has a hedge against inflation. The question then becomes, so if I convert existing currency into BTC, where are the bitcoins coming from? From BTC that was mined at some point? Another question emerges, where if the supply is not growing fast enough to meet the demand for BTC? could you hypothetically have a waiting period for BTC?

You aren't converting anything.  You are BUYING coins.  Coins owned by someone else.

Replace gold in your paragraph above.  Is it ever possible for gold to "run out"?  Of course not.  If demand > supply (supply willing to be sold at current price) then prices rise and that results in more supply (people who are unwilling to sell @ $5 might be willing to sell @ $7, $8, $20, $10,000 ).

I strongly recommend you take an afternoon and browse:
https://en.bitcoin.it/wiki/Main_Page
&
http://bitcoin.stackexchange.com/

Lots of good info.  Asking questions in a forum is useful but you are going to end up with incomplete information.  Best to get a broad overview and then fill in gaps with more informed questions.

[Ryan Rudolph]

thanks, I will browse through that information. 

[jwzguy]

Ryan, something a lot of newbs aren't initially aware of: mining is what processes bitcoin transactions. Without mining you can't transfer bitcoins.