NOTE: ’gold’ is a bad example for a mineral in my metaphorical mine. You’d probably do best not to think of it as gold but as any old interesting thing you might dig up from a mine. I’m not going to edit it all out because people are responding to me to attack the gold example. But… everyone has heard of gold and they probably know it comes from mines. It wouldn’t be as semantically interesting to discuss hematite or zinc or titanium dioxide even though those are all hugely important and common.
Mining Bitcoins is like mining a precious mineral (let’s say gold) from a single, very deep mine. If you want you can think of it in very small terms like inside a sandbox – and if you want you can think of it in very large terms like in the Earth’s crust, where an actual mine would be.
The “Bitcoin mine” is the basic protocol that governs the release of the bitcoins, think of it like the entire seam of gold running all the way into the Earth. The gold is pretty much the same quality all the way down as far as it goes, but the mine is VERY deep and the surrounding rock gets harder and harder to dig through every 10 minutes. At the surface, when people were just starting to crack into the big mine… it was very very easy to have your computer start tapping away at the big seam of gold (mining for bitcoins by decrypting little bits of code based in the original protocol). Basically you could walk to the mine and scoop up gold (bitcoins) with your hands. It was very easy to get the first few. But eventually the gold on the top got mined out, after lots and lots of 10 minute cycles.
[25 bitcoins are released from the code-block every 10 minutes — and that’s when the mine gets just a little bit harder to dig into… (in the year 2017 the difficulty will go up again, and only 12.5 will be released – this is how we get our hard upper limit in 2140)]
So once the gold on the surface was all cleared out and the rock got a little bit harder to dig into, the first people to get shovels and pick axes probably still found it pretty easy to get the gold. Even though the rock was a little too hard to scrape up with their hands, their basic tools could do the job. The bitcoins were getting harder to mine because the total number was expanding. And the protocol dictates that only 21 million bitcoins must ever exist – the last to be found at the end of the last 10 minute cycle in the year 2140.
Now… bitcoins weren’t very valuable at this point because anyone could just go into the mine and do a little bit of easy mining to get some coins. There wasn’t much confidence in their value either. Not a lot of people wanted to deal with this gold. Imagine it’s a funny color that people haven’t seen before. No government or bank is controlling its price. All that matters is that there’s gold in the mine and people can trade it around or even trade it for cash if there ends up being enough faith that it’s worth something.
When the mining got a little bit tougher and you needed to have a little bit of a better computer to get into the mining business… people saw that there were a few million coins around that the supply was slow to grow but that it couldn’t really be tampered with. The mine was always going to be there. Yes people could debate what the mineral was worth. They could throw it away or dump it in the ocean or lose the keys to their personal vault… but the mine would be there in the morning and if you had the right tools you could keep mining and helping to increase the supply of the coins.
Eventually, the people with the pick axes and the shovels (these were people using their CPUs to mine for bitcoins by cracking the code in the protocol) just couldn’t get any more gold out. Their tools weren’t powerful enough to crack through the deepest layers of surrounding rock anymore. So they turned to more powerful tools.
In come the GPU miners… people who used the graphics processors in their computers to keep cracking away at the bitcoin protocol and finding more ‘gold’ in the mine. These guys (and gals) brought powerful motorized diggers, front-end loaders, dump trucks, and excavators. They had the tools to keep mining and because they often worked in “pools” and used their big powerful tools together… they could pretty reliable mine more gold even as the mine got deeper. They would just split the profits from the coins that they mined because no single person was really getting very many on their own.
Today… the value of the bitcoin is much higher than it originally was. People have some decent faith in the value of the ‘gold’ mined from the invisible bitcoin mine. A lot of common stores will accept the currency and a lot of big companies are falling in line to start accepting it. They can see that the gold from the mine isn’t really a funny color after all, and that’s okay that no big central power controls it. They have some decent faith in the base protocol and they’re willing to let people get a little experimental with their payments.
But the mine keeps getting deeper… and because it’s so much more difficult to dig up new bitcoins… you need much more powerful tools and bigger pools. The value expands with the total number and the number of people who have faith in the system. The more people buy into the bitcoin market… the more valuable the market becomes. If everyone thinks they can tap the mine… then they can! And that gold really starts being worth something.
In the next few months some amazing machines called ASIC miners are going to come online. These are the bad-boys of industry and they are going to make quick work of the next deeper level of the mine. They will be able to crack the base protocol’s code thousands of times faster than even the GPU miners with their fancy automated equipment. The ASIC miners are taking nuclear explosives, plasma drills, and massive sky-scraper sized excavators to the mine. They will be able to do more work in an afternoon than the other guys could in a year! But the mine keeps getting deeper… and eventually even they won’t be powerful enough to quickly crack into the next layer of rock. A powerful ASIC mining computer can cost more than a new car!!! But because it’s so powerful, it may be able to make twice that in a month if the cost of the bitcoins stays stable or rises.
But here’s the kicker… because the total number of coins in circulation can never exceed the set amount in the base protocol… and because the mine can never get deeper… there will only ever be that set. Every month it will get twice as difficult to crack into the rock and mine bitcoins. Hence improvements in the tools being used. But for those at the top and those operating in large pools… the bitcoins will keep flowing.
One big reason bitcoins are attractive is that they aren’t “fiat” money controlled by a central organization or government. They aren’t based in a promise. They’re based in the solid code of the base protocol. In order to buy and sell bitcoins you trade the coded address of a coin – never a real object. The exchanges are usually fast and virtually completely anonymous. This makes them very appealing as a new type of currency in our increasingly wired/surveiled world.