What is the simplest way to explain Bitcoin?

[avni000]

i understand the basics of Bitcoin (purely digital virtual coins with no middle man for exchange) but can someone explain some of the details like why only 21M cap and what mining vs buying entails (eg can anyone with right hardware mine?). Also what roll do the exchanges play and is there compatibility between different currencies on the Bitcoin protocol? Would love a simple primer on some of the nuances.

[mod]

21M was built-in to the specification. I don't know the entirety of the reason, but presumably to help prevent decreasing the value of existing bitcoins for all time. (If you kept minting them, there'd always be new ones devaluing existing ones, like how the US gov't does with dollars).

Buying means you buy already-minted bitcoins. You can buy them privately or on exchanges. Then they're yours. The exchanges' role is to facilitate trading between users, and they operate at a profit (they charge you a % to buy). Basically, it'd be hard to sell your bitcoin if you didn't have exchanges. You'd be posting on craigslist or something. And people would be scamming you for the money. Stuff like that.

Anyone can mine on virtually any hardware, however due to competition, it's hard to mine profitably. You have to have specialty equipment that is both very good and very efficient (power-wise). You can mine on your own or as part of a pool, but you essentially have to 'get lucky' on your own, and it's very unlikely that'll happen. My advice is to not think about mining until you've done a lot of research and for some reason decide you want to do it. It's a bad idea for almost every non-expert at this point.

[bbcbasic]

Mining requires expending computing power to solve a puzzle. The puzzle is to get the hash of a bunch of transactions below a certain number. The first to solve it receives a number of bitcoins.

Mining is based on a network agreed difficulty level. So as more miners participate and get better hardware the difficulty of the puzzle increases (by lowering the bar).

Currently it requires dedicated custom-built hardware (built solely for mining bitcoins) to make any kind of money mining Bitcoin. Even then you have little chance of winning the reward - so you normally would join a mining pool to pool computing power and share rewards with other miners.

The mining acts as a proof of work. It helps solves the problem that in a peer-peer system you can't trust anyone, because in a democratic system an attacker can run up any number of nodes they like at little cost. However with mining this is not possible, such nodes will not be trusted.

This is a very simplified view of things and there are more complexities but it gives you an idea.

[avni000 → bbcbasic]

This is really helpful - thanks. A follow up question about volatility - is it true that volatility only really exists when trying to convert to currencies like the dollar or pound but doesn't exist if you remain within Bitcoin? Wouldn't that imply that it's like gold where it's good to buy as much as you can when the price in dollars drops but that once you own Bitcoin the price of goods in Bitcoin would remain constant?

[logn → avni000]

The BTC price of goods only remains constant if sellers decide so. And they generally have a supply chain and labor that is heavily impacted by exchange rates. Plus, neither consumers or producers are ignorant of exchange rates, so there aren't going to be products marked at 1 BTC forever if BTC appreciates/depreciates.

But there's nothing within BTC itself that's volatile. The currency is slowly being inflated to the target 21 MM coins.

[J-dawg]

To add to this question, I'd love a simple primer on how the blockchain works. I understand that mining Bitcoin is the process of bruteforcing a hash function which is derived from a previous part of the blockchain. To transfer ownership / spend Bitcoin I simply have to send this string to somebody. But how does this work with Bitcoin being de-centralised? What if two or more people mine the same Bitcoin (succeed in bruteforcing the hash function) at the same time. How do you decide who is the real owner with no central authority to confirm ownership?

[logn → J-dawg]

This paper is worth a read: https://bitcoin.org/bitcoin.pdf

From page 3:

Nodes always consider the longest chain to be the correct one and will keep working on extending it. If two nodes broadcast different versions of the next block simultaneously, some nodes may receive one or the other first. In that case, they work on the first one they received, but save the other branch in case it becomes longer. The tie will be broken when the next proof-of-work is found and one branch becomes longer; the nodes that were working on the other branch will then switch to the longer one.

[brudgers]

Tulip bulbs less the nutritional content.