Recently I got in a discussion with my brother over what bitcoin is and what mining is. He had never heard of it so I had to do my best to explain it all from the beginning. I had trouble explaining certain aspects of mining though. He only understood Bitcoin from the standpoint of it being disruptive and undermining or potentially destroying the US economy. He saw my actions of mining crypto currency as printing money at home and artificially inflating the US economy. I tried to explain that essentially it is the US economy and other fiat currencies that are the ones printing money and causing massive inflation and that Bitcoin in the long term does not suffer from that problem. I am having difficultly still though understanding the best way to explain to him where the money comes from when I mine, how it is different from printing money. Anyone else out there have a similar experience or know the best way to explain this?
Is mining gold creating money? It's called mining because work goes into it. The money that comes out of it is remuneration. When the FED increases (er, eases) money into our system it's done by adding a few digits to an account. There literally is no work that goes into that. I cannot make bitcoin with no work -- that's the primary differentiator. Gold and bitcoin have real work backing them. Understanding would be enhanced by a read through Bastiat's economic sophisms: https://mises.org/library/bastiat-collection . This book is also recommended: https://mises.org/library/mystery-banking
Mining serves mainly two purposes:
It prevents Bitcoin from any fraudulent activity as opposed to fiat currencies like double spending or manipulating transaction history. At every transaction level, every network nodes literally check the authenticity of the transaction right from the first transaction to the most recent one. Mining is the reason why no one can "print the money" on his/her will but at consensus will.
Since the reward can only be given to one node, mining is also important to determine the rightful owner of the reward in cases where multiple miners solve the proof of work puzzle. The award is given to the miner whose block is accepted by the major section of the network.
As opposed to fiat literally everyone can participate in "money making" by running a full node or joining mining pools. Hence mining also provides an honest platform for money making removing the need for any third party institution.
If a miner somehow accumulates 50% plus hashing power and alters the transaction history mining is the reason you can publicly know about his/her fraudulent activity. As a result either the price of the coin will fall down or other miners will power the right blockchain to make it the longest chain. Hence mining also ensures that no matter what the cheat miner gets nothing even having 50% plus hashing power.
Mining is the reason why a financial institution cannot demonetize or inflate an economy on their will because they cannot control or destroy the network alone.
Think of it like printing money, but when you print money, you are limited in your supply of paper, ink, and even electricity to produce exactly 21,000,000 U.S. dollars.
When you talk about inflation, you talk about a rise in price for good and services transacting with that currency. Usually, the reason there is inflation is because of the increase in money supply. When more USD is printed, the money supply goes up and therefore the economy is partially inflated.
Mining Bitcoins does not have this effect. Why? Because no matter how much you mine, everyone knows that there is a limit of 21,000,000 Bitcoin. The supply is fixed; what's in circulation is what's changing.
Even in the original whitepaper by Satoshi Nakamoto mining for Bitcoin was akin to mining for gold.
... This adds an incentive for nodes to support the network, and provides a way to initially distribute coins into circulation, since there is no central authority to issue them. The steady addition of a constant of amount of new coins is analogous to gold miners expending resources to add gold to circulation. ...
It is a difficult situation when your brother misunderstands the way that the economy works, but his ideas are reasonably commonplace.
Mining for Bitcoin is certainly not free money (unless you get your PC, mining hardware, electricity and, internet for free!), it is a business model with inputs, work (you employ the minig hardware to do that) and, outputs.
It is costly to mine bitcoin. When I mine it I am expending energy, that energy is being paid for by me. If the bitcoin that I mine is worth the same exact value as the cost of energy that I use then there isnt any new money actually entering the economy which results in no inflation. However if my mining is profitable then I am essentially taking advantage of an arbitrage opportunity ( https://en.wikipedia.org/wiki/Arbitrage ) which happens by taking cheap energy and producing more valuable bitcoin which may seem like inflation but it is actually not because in order for me to capture my gain I would have to sell my bitcoin which would result in the exchange price of bitcoin falling slightly. As all of the profitability from mining bitcoin is sold on the market (in order to capture gains) the exchange price of bitcoin and the cost of energy needed to produce the bitcoin begin to reach an equilibrium which as mentioned earlier does not result in inflation.
When the us government decides to print their own money they too are taking advantage of an arbitrage opportunity by printing paper money which has a cost of zero and selling it on the market for real value. This results in a decrease in the value of the currency itself similarly to how the selling of bitcoin on the market results in a decrease in value. All currencies ultimately arrive at the equivalent value of their cost which for government currency is zero. The only reason government money is not at zero yet is because they have exclusive control over printing the paper so they choose to do it slowly in a way that hopefully others do not catch on to. If everyone was offered the ability to print paper money then it would almost immediately crash to a value of zero as that is the value of printing the paper. One of the most important aspects of bitcoin is that the ability to mine it increases in difficulty as more people try to expend energy in creating it. Simply put, no matter how much paper money you decide to print the cost of producing it will always be zero but with the bitcoin network throwing more energy at producing the bitcoin currency results in an increase in energy required ultimately resulting in another stabilizing equilibrium of energy expended equaling value received. This is why mining bitcoin does not result in inflation but printing paper does result in inflation.